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SllYMorii \\ ALTON 

\\'\LTi:n S, ,'on\.^o\ 

I f 

s «4^ 

Money and 











Modern Business 

Canadian Edition 

Volume VII 




('0PVliIi:HT, lOl:;, BY 


CopyiiiiaiT, lUi:i, BV 

CripVliMIlT, 1911, BV 





This volume (liscusses questions in which the iVmerican 
peo])le have heen I'oreed hy events to take a deep and 
personal interest. The rise cf prices and resultant in- 
crease in the cost of living since 181)7 have ])rovoked uni- 
versal discussion and even called forth proclamations of 
disapproval from mayors, governors and other j)ublic 
men. Canada lias succeeded in avoiding many of the 
monetary evils common to other countries. The panic of 
1907, while it affected Canada, was due to causes prevail- 
ing in the Ignited States. Similarly the tight money 
situation in 191.3 was caused hy conditions south of the 
border. The discussion of both Canadian and United 
States money ])roblems will, therefore, be of special in- 
terest to business men in Canada. 

It goes without saying that no man is fit to plan the 
digghig of a tunnel or the construction of a railroad, to 
mend a clock or repair an automobile, unless he has had 
a certain amount of scientific trainiiig. In mechanics 
the world recognizes the need and ])ractical value of 
science. l!i finance the same need exists, but it is not 
yet generally acknowledged. E\erybody thinks he un- 
derstands the money (juestion, or that it is not worth 
understanding, and the average man is inclined to think 
that the business of banking is so simple that if our 
banks have in any way fallen short of their duty, the men 
M'ho manage them must either be very ignorant of their 
business or very selfish and sjieculative in their methods. 

As a matter of fact, the science of monev and credit. 


wl.ilc almost as exact in its nature as niathematiis is 
one ,>| the most difJicult in the AvhoJe fieUl of economies, 
and the h.isiness or profession of hanking-, wliich is 
founded ujx.n llmt science and should be conducted in 
aceonhmce with its principles, is one demanding the 
keenest and clearest hrain. Industry furnishes the red 
blood of the economic organism. Trade and commerce 
are its cn-culatory system. Finance is its sys- 
tem. If the banker is incompetent and fails in the p'.r- 
formance of his task, the entire business world is pai-a- 

In the present volume the effort has been made to 
.yivethe reader in the clearest possible lan<,niage a scien- 
tiHc knowledge of money and cre(!it and an accurate 
description and analysis of the various banking systems 
with which the world is now having experience. Tlie 
subject is difficult and no reader can expect to get en- 
lightenment from this book unless he is willin." to think 
as he reads. If he will d(. that, I feel certain that he 
wdl quickly grasp all the principles expounded and in 
the end discover that many business prol)lems whieii 
have perplexed him have been made easy of solution. 

The editor cannot too strongly advise" that this volume 
be read carefully by the general business man. The 
hanker, of course, should understand the subject. If 
lie does not, he is conducting his business by rule of 
thumb, and is courting disaster. But the business man 
should not think that Money and Banking are matters 
with which he is not concerned. On the contrary, they 
treat of matters which immediately concern him! The 
relation of money to the upward and downward swings 
of prices is something which the average Inisiness man 
does not percei^•e, yet it is something which he ought to 
understand, for his prosperity often depends on causes 


affecting' merely the (kniaiid lor and supply of money. 
The j)riee.s of commodities are merely an expression of 
the value of money and tliey change whenever money 
ehan^es. The business man who Unows on* i-e con- 
ditions which govern the value of the commoiiiiv which 
he handles is only half protected against loss. 1 1' h. 
would he safe he must know also the conditions which 
determine the value of money. 

Joseph Frexch Johnsons 
New York University. 






I • 





rilAI'TFH I. 


Reasons for tlic Study of Moiuy ,iii(i Hmkiiig ... l 

Warnings of the l.aU; Panic 3 

Sciiiicf 3 

linance g 

'I'l clinology and HuNimss 4 

BiisiiKss tlif Hisult of .S|)((iili/,,iii,,ii ,if L:il),)r . , 5 

I'rodiu'tion 5 

Production by C'ii.ingc ot Dwm rslii]) (j 

'I'ardy Id cognition ot' \'aluc of Exchange .... 7 

Pri\atc Property g 

Property and WValtli g 

Integration of Industry 10 

(HAPriH (I. 

EXt 11 ANUE. 

1.'^. Beginning of l!\cliaiigc 

1 1. Barter 

l."i. .Money 

1(1. .Money l{ej)resents Ini'oniplete Kxcliangi s 

17. Credit 

IS. ( redits as Media of I".\cli.inge . 

I!>. .Money and Credit Hepresentatives of \\( a 

'JO. Classification of Wi dtli 

-1. l'.ntrepren( ur .System 

■J-J. Capital 

'23. Capitalization 


I I 





'-H. D.inaiid for Capital CnniU 

-."'. .Mumy IiK'omts .... 

■-'()'. .Mithods ot' Iin,stii),iit 

-7. Rtal Invfstiiiciit . 



'■is. Valii,' a R,.<rist,-r of Kr..n,unir Vorcrs 

'-'!). .Mtaiiiiiir ()(■ •• \-,.,|,|,. "... 

•it). Dcrinitioii (if till 

•n. Kxchann-.abilitv ti„. [-tilitv of M.ii 

■'*■-'. (iol'l not ai! Iiloal Standard 

.'i.'l Dctrrniiiiation oC \aluc 

.'it. rtility Tlirory of \'aliu' 

<i.'>. .Maruiiial I'tijity .... 

•i<). .MarMi„,.,I l-uUiy („ i|„. hulixid: 

ti7. H.conciliatioii of tin- two Tlirori, s 












CHAl'TI.H l\-. 

•is. I'riniili\f Ideas of \'alsi.- 

■i!». ()rnani.„lai .^ton,-. Karly IMd as Mi,,;,',. 

t". 'I'lirrr I'linctions of j'rnintn.' M,i„ry 

H. W aiiipiiiii 

12. H.avr:- Skins 

t;i. A|,n-ii idtural i'rodiicts as Mon.y 

a. 'I'oliacco .... 

i'>- Summary of I'rinciplrs 

Id. Divisiliility 

17. I nifiirmity 

l-'^- ( oj^iii/aliility 

Mi. .>^t.diilit\ of \-altir 

. fir> 

■ . at) 

. . 'Mi 

. . 36 

. . .'i7 

. . 38 

. . 38 

. 40 

. 41 



'■ 11 \ I' it I; \ . 
KVOIt Tiov ,„ ,■,,,.. sTWDMd, OF VAFl F 
r>0. M.lal Slandard-, thr I iii,.( i,, .w,,,,;,,. 
:'>\ (iooij (^11 diti, s , . . 

I I 






. 48 

. 49 

. .^0 

. 51 

. 52 


.'>2. Platinum I'liMicrrssfiil ,is Mdiuv 

.'5;). Oiijictioiis to (iold ,111(1 Sil\(r 

:"> K Coiii/ifTi' 

.").■). Nanus of ('dins 

.■)(). Hrtiuircnu nts df (khhI Coinage 4- 

57. Standard of \'alnr 

T'S. Donl,],. Stan. lard I' l-ntil Last (cntiiry 

.'lU. ( in sliani s Law 

(il>. .Mi.stak< s of I'.arly I.rgislalors 

()1. K\j)( rirnr,. of Knjrj.ipd uiH, I),mi!iI( Stand.inl 

<)''^'. Adoption of Singlr (,old Standard I innt, ntional . . 53 

6:i. .Mintage ,, 

Cn. I.tgal T. iid. r 52 

6r>. Historv ot' ( fiinagc in tlic Cnitrd States .... 5() 

(i(i. First Ratio ot' Sil\<r to (iojd | ,", ; | 5,j 

()7. Inaeiairacy of tin- Ratio ,ind its I'llf, cts 5- 

68. Disappear.aiic.' of tli.' Sii\er Dollars 5)^ 

6.0. Cliailge of Ratio to !(i:I g^ 

70. I.( gal ■{', nd, r Acts Created a Paper Standard . . . 6O 

71. Single (iold Standard alter l,S7;) (jj 

7:J. -Vet of I poo ' g„ 

7^. Suniinarv . . r,-, 

• • ()J 

( HAPi'l'li \ I. 
STAND Mil) Ol' Di.j KlfUKl) l> \ VM (-.NTS. 

7L n.'f'.cts of (,,,],] 

75. I)' linition of Drfrrnd Pavnieiils 

76. I'fl'eet of legal i'l nder I aus ...... 

77. Coristitulion alily of I ecr.ij 'i'mdc r \ets 

78. Delitor ( l.iss Injiind l>\ .111 .\ppreeiatiMg St.uidird 



srrn.v wr) di.mwm i\ lii.i, \ iiov to movky. 

so. Prires D. p. nd Cpnii ||i, ^tone\ Matk.t 

XL I't!!!!' of \!f.!:: I 

8'.'. Distinction IMudu 1), Mn .iiid D.niand 




S.^. Tiirrr \';)rj( ties rif Money 

'"^K I'iat \. Cr.'dit Momv 

>^'>- Di'iiiaiKl (or .Muiicv Aiialvzcd 

Sf). Hapiifity of ( irciil.itioii 

X7. Krt'rct of I'opiil.ltioii 

■■^N.'ivi of DiMsioil of l.;il,o|- 

S.M. Sjiccial Dciiiaiul for (,,il,l 

!"l. I'ayiiiiiit of ('ontracts 

<M. Store of \-;,iiie 

!»'-'. [riMriirity of Property and Coiitraets 

.'):i. Spirial Demand for Money as a Store of \-al„e . 

iH. Hoardinii" 

!)a. Dei'liiie of Hoardinjx 

06". Jiink Hes( r\(s not Hoards 

,'>7. (io\ernni(nt Iloardino' 

.'»N. Diseriininatioii in Demand for Money 

!»<>. Seasonal Demand for Money 

HID. Demand tor M.m.y in International Trade 

nil. I'remiinn on Crold 

ll'-;. Lneertainty of tlie Demand for Money 

ill.'!. Snpply of Moi:ev 

I'U. X'arielies of Tnitid States Mn?iev 

11'.". Siipply of (,,,l,i " _ 

l"(i. I'.ietors in tl,e Snpply of C.old g.j 

i"7. I'ecnliarity of tiie Snpply of i.old 

!"''<■ Ul^torrell Illustrations 

I"!'. ■|''iiip..rary Hesnits of ( jianp ,.f Mom y Supply . 

ll'». ''I" i of Increased Supply of (, old Traerd Out . 

'"• ' il"'l '" 111' I'fice-Haisinf; Klfeet of (,o!d 

I I'-'. .\lt, rnali\e [Ms ,,( .\ , w (iold 

I I.!. Widespread l.lleel of' \, w (,old 

1 I I. ( nn.p.irison of Kileet of Incr. is, of Supply ol (.old and 

I' a])' r Mom y 

II.-.. ilo« Mueli Momy is Needed m a loiintry.* 

Ilti. I'nee ( hantr>s not Sviielironons 

117. Stiiiml.itin^- Kdret of Hisini: I'ru-i s 

I I H. He.ielioii 

I l<>. .Svvlnirv ,,«' I>>; 



I .'' 



. 7S 
. 7S 
• 7.<> 
. 80 
. 80 
. 81 
. 81 
. 82 


I'-'O. C'linuilativ, Ktle.t of i:(()noinie Torres 






cHArri.i} \iii. 


12; J. 
12 K 
1 29. 
! -.i'.h 

" Slinrt " Sales of Moiiry . 

" Squcezi!if; tlic Shorts "... 

Forced Selling 

Peo|;le Heeoniing Better I'xliicatcd 
Ciriier;il Price Level .... 

Price 'r.iMes 

M'lny ( oniiTioditie.s 

Kxampie of I'riee T.ililc . 
" W'eiglitiiig " of Price Tables . 
Advaiit.ifies of Weiglitiiig . 
Falkiier Price j'ahli' .... 
High Prices During the Cnil War 
I'oreigii Price Tallies .... 
Kcmiomic I'orces to he Observed . 
Saving and In\csting .... 


136. Relation 15et\M(ti i'ori ign .-iiid Doniestic I'xch ing 

I.S7. Paniients 1)\- Means of Credit Balances . 

138. rnnction of the liatik in Making Paymciils 

1.3f). Payments at a Distance 

IK). Exch.'nge on New ^ Ork 

IH. How the H.inks Handle New York I'xchangi 

1 PJ. Setthinenl of .\ccoiints J^etween H.-nks . 

1 t-.T. Cost of Ciirreiicy Shipments .... 

IH-. Settlements 'I'hrongh the .*^ul)-tre isnries . 

1 I,'). Rate ot' Ni \v ^ Ork Kxchange .... 

1 16. .'^ignificanee of Rates o'' Domestic ]-,\eh,ingi 

147. The ( ieiring House Principle 

118. Settlmu; llilanees hv Cse of ( r.dit . 

1 If), (iold the Internal Min.'il Medium 

!,")(). |-'iinction of tlx' Dealer in F'onign I'.xclianui 

\!t\, }■' \ ■ininlc of I''<irii<r.i ]' vi-jiMiiirc 

1.VJ. Why Minker* ari^ \\'illirtg to Pur<'hise I nm^ 

iriii. l»rogress of Draft ' 












1 1 











Xn LStockholdrr 


lai. Quotations for Forcifjii Exchange 

1,)5. Tlir Pound Strrling 

1^)6. Cost of Sliipping Gold 

157- The Minimum Gohl Point for Sterling Exchange 

158. Maximum Gold Point for Sterling Exeh,i 

159- Wliv Sterling Exchange May Fall Below 

160. The Gold Market . . . . 

Ifil. Bank of France .... 

162. Gold Shipments .... 

16.3. Our Foreign Commerce 

16 i. Invisible Items of Foreign Trade 

16.5. Movements of Capital . 

166. Interest and Dividend Payments to 

167. Freight 

168. Tourists 

169. Foreign Exchange Market . 

1 70. Explanation of Articles 

171. Cables 

17"-3. Varieties of Foreign Exchange . 

17.S. Demand Sterling .... 

171'. English Banking Customs . 

175. Finance Bills 

176. Profit on Finance Bills . 
Foreign Department of a Bank 
Traveler's Letters of Credit . 
Ccinmereial Letters of Credit . 
Buy'ng I-'oreign Exchange for In\ 

181. German and French Exchange . 

182. Arbitrage 




World's .'Jtock of (Jold . 
History of the Precious Metal 
Tlic I' Period . 
Discovery of America . 
t', tiect of Sdvor from America 
Piiiti tallism Defined 











1 .'30 



I, 12 














I 15 


I 17 




155 ^ 
155 ' 


BECTION p^^.j, 

189. Difficulties of Bimct.-illism 157 

19U. Adv.uit.igts of Biiiutallism 1 j8 

191. The SiiifrJe Staiid;ird :58 

192. E.irly Atltiiipts .'it Inriation I60 

\i)'-i. Tile L.itin Uiiion KJO 

191. IJtiiioiittization of Silver by the United States . . . nil 

1!)5. Acts of 187S and 1S9() l(,o 

196. British Indi.a aiid the Coinafre of Silver 1()3 

197. Final Tailure of Bimetallism Itjl 


198. Economic Situ ition in Canada After the Conquest . . I66 

199. New England Traders \(](] 

200. Financial Situation After the Conquest 1(J7 

201. Early Exi)erinunts in .M.dia of Exchange .... 1(J8 

202. Standard Currency of the Colony KJc) 

203. Clianirrs in the Currency After 1783 170 

201. Ditfieidty of Changing Practice 171 

205. Act of 1808 I70 

20C. Dual I'uiutions of the Early Canadian Merchant . . 173 

207. Early Pealings in Foreign Exchange 173 

208. War of 1S12 in Its Relation to Canadian Finance . .171 

209. Attitude Toward Pa)'er Currency 17.5 

210. Origin of the (in at Chartered Hanks I76 

211. Alex.inder Hamilton's Principles .Adopted .... I76 

212. Articles of .Assoeiatieiii I77 

213. First 15aiiks of I'ppt r Canada 178 

211. Atlinq)ts at Currency Reform 178 

215. Result of Currency Reform 1 70 

216. Exchange with the l'nit( d Kingdom 180 

217. Canidian Curnriey in the Second Quarter of the Nine- 

teenth Centurv 181 

218. Variety of Coins Circulated 182 

219. Can.idian Currency .\fter tlie Cnion of Cpper and Lower 

Can.ida in ISH . let 

220. Issue of Short Time (hu eminent Oehenture in 1 8 18 . 18 1 

221. Crisis of 1857 185 







PAOki ! 

169 . 

. . 186 


. . 186 


. . 187 

. . 189 , 


• ■ 190 \ 


. . 191 

• • 

. . 192 


Early Attinipt at Government Note Issues 

Mr. Gait's Plan 

J'roviiK'ial Noti- Issues 

Dominion Notts for Banking' Reserves 
Later Legislation Concerning Dominion 
R( suit of Sir Francis Hincks' Legislation. 
Uniform Currency in Canada . 




229. Origin and Kinds of Credits 193 

2,J(). I'se of Credit in Industry igi' 

2^1. Function of Conunercial Banking 195 

-2'.'>2. Mortgages and Bonds 196 

-2:>:i. Example of Timber Industry 196 

-231. Advantages of Timber Bonds 198 

23'). Interest Rates on Bonds 198 

236. Long-tinu; Borrowing 199 

237. Credit Economizes the Use of Gold 199 

2.'i>S. Li(iuidation of Credit 200 

239. Conunercial Paper Houses and the Credit Situation . . 201 

2K). Use of Credit as a Medium of Exchange 202 

2H. Bank Credit 202 

ti2. 1)( posit Credit 203 

'J 13. I'.lastieity of Dejiosit Credit 20t 

2 11. (Jold Jie Basis for all Credit 205 

'JLV Reserve 207 

2 Ki. Eff- ct of Reserve Requirements 207 

2 17. Danger of Use of Credit in Panics 208 

218. Importance of Credit 209 


Q.tO rn/.r.-iKinrr Vi./I .-,( \fiir.. FitiiMciit \fnlifv , . , .211 

250. EfTect of N 

on-i ireu 






251. C: 

•11. • 

if Credit 21; 




How I.rss.ii(<] |)riii,ni(l tor Moiiry Caiisrs IJjm' m I'rir. s 'J 1 ;5 
KtfVc't of Nilioiial IJ.iuk Xolcs -'■' 

tlji IJalik Not 

ts .■111(1 C'liccks 


■Jl !• 

l-'.ti'cct of (io\ rn 

it ' rciiit Moiuv 

ii,")(). CniiiL 111(1 S|) 



ow Spcculatioii 

Mav 15.- Both Cause and I'.lfcct ol a 


sf in 


!58. Dt'ffct of our (urritu-y Sysuin 


c HA I'll, u xi\'. 


2.")0. Cl.issiticatioii of (io\iriniun 

t ( r. 

( tii-rrli.-v 

•2()0. I'iat M. 


i()l. r'actors Dtterniiniiifi 

the N'.iliic of Crrdit Monry 

'iti'J. Risk in Tree I'sc of Credit Money 
t:6[i. Rcmil.ition of Credit Money , 

;l. DcNii 

to M.aliit.aiii X'.ilue of Credit Money 


(ioverniiH lit 

C ridit not "Ideal Mo-v 

2(ry. Diffieiiltie.s of Adjusting Siii>])ly 

l67. Prejudices Ag.iinst Cio'x 

2()8. l"inanein< 


t Cr((lit Monev R 

tlie Civil 


t2()!). Disadv.ant.ige of (io\ ( riiinent Diht 

270. {ioverillliellt Delit 

271. Demand Debts a 


l~2. Provisions 

for Rdirini 


2 '20 

!2 1. 


22 S 


27.'1. Produeti - Industries Clissili 


271. IJee.iiii 

tul.itiou of I' Priiieiples 

Cr< (lit 

27(i. H 

Dealer in Credits 

Ranks ."^iijiply a Medinni of I'.x 


278. R.ankiiiii is ;i (Juasi-l'ublie I'unetion 
27!). Tlie Hank .a Distributor of 
280. Bankin-i Prineii'lc 





'281. Ddiililc I'liiicticiri ol' ( nimnt li.iiik.s 

'28-2. I'rivih lie of ISuikt rs . 

28a. H.iiiks Do Not Crcitr Capital . 

'281. Source of Capital and Credit of Hank 

'■28'). Opirations of ;i Hank 

i28(). Hesponsiliility of the Hanker for i'ropi r I )i>>tril)ution of 


'2 1-2 
2 i;i 

Capital -2l\ 


ni:r()SiT cckkkncv. 

of Credit 21S 

287. Anal_ 

'288. How Credit Promotes Iridiislry .... 

■28f). Hanks Create Credits 

"290. Hank Credit {'referable to Cash .... 

2<)1. Sliiftinii of JJank Credit \\'ithoiit I.itjuidatioii 

'2<)2. Similarity of Checks and J5ank Nott s . 

2f).S. Limits of Karninj.; 1N)\V( r of the Hank . 

291'. Ditference Hetween a Casii atul Cn dit Loan . 

29;"). Cash a Precious Commodity at Times . 

2!K). Prohlem of the Reser\ e of (ireatcst Importance 

297- Lack of Co()|)( ration Causes Hanks to Lose Ilcserv 

298. .Methods of Incr<asiiisr Reserves . 

299- Secondary Reserve 

.'5()(). L'nrcliahility of Hoiids as Reserves 

301. Government Deposits .... 

2 H) 
2.-) 1 
2."). '5 
25, -5 
2:) t 
2.-. 7 


Coiiiliined Stall iiient 

.'5(12. Comliined Stati iiient 2()() 

,'!().'). Proof' of the D( posit Currency Theory 2()1 

'MM. Douhle-Kntry System 21)2 

.'i()5. .Mteralions in \' due of Resources 21).'l 

;i()(i. Concealed Assets 2(i t 

.'i07. Loans .and Discounts 2f) t 

:i(i8. Overdrafts 2^5 

.i(>9- I nited States Bonds to Secure Circulation .... 2()() 

31U. rnitrd States Honds to Secure I'mtfd Stil,s Dt i)osits 2f)6 




till. L'liilid M.iti > Hdiuis (III H.iml . 

yi'2. I'n iiiiiim^ oil L iiittd Sl.itis lioiitls . 

,'11 ;i. 15(iii(l.s, Sii'iiritit .s. ttf 

M k Hanking ilimsc I'uniiturf and I'ixtiiri-s 

;;:,'). OtlkT lU:i\ Kstatc lldUiiiigs . 

;il(). Due I'roni National Hanks .... 

;il7. Due I'roiu .Vpiirovrd Hcsirvi' .\j;;'nts 

;il8. (lucks and Olhrr Cash I Uiiis ~ - Kxcli 

C'ltarint;- Houst- 

:'<][). Hills of OtliLi- Nalional Banks . 

.S'.iO. Lfgal '!'( lidir Notes 

;i'21. Ucd; inptioii I'lind 

'3'i:i. Due From the rniliil States Treasury 








323. C'a])ital .Stock Paid In . 

321. Doiihle I.ialiiiity of Stoekliolders . 

3-'.-). Surplus ImuuI 

326. L'ndivid.d I'roHts 

327. National Hank Notes «. mdiiig . 

328. St ite Hank Notes Oiii aiding . 
32!K lndi\itlual Deposits .... 

330. I'nited States I)e))osits and Deposits 

Dislnirsing Ottieers .... 

331. Honds Horrowiil 

.332. Notes and Hills Ketliseountt d . 

333. Hills I'ayaln.' 

331. Certitied Cheek 

335. C'asiiit r's Cheeks Or.lstaniling . 


of Li 

ted S 








336 National Hanks 

337. .Slate Hanks . 

,33H. Private Hanks 

339. I'lidi rw riting 

. 280 

. 280 
. 280 
. 281 




340. 'I'rust C ouip.iiiit s 

311. li.iiikiii'i- Dcpartiiiriit .... 

.'i t'2. Deposits (if Trust (iiinpaiiifs . 

.'U;i. 'rnist 1)( pirliiit lit 

'Ml. I"iii\iiliial Trusts 

y !-,">. Corpdrati' Trusts 

;i Ki. Sa\ iiij^s IJaiiks 

;i t7- I'Ik' Orjiaiiizatioii (»!' a IJaiik . 

.'i 18. Kvolutioii of tlie Bank .... 

3\[). .Stocklioldrrs 

3:'>0. Directors 

351. C'oiisidtr.atioiis (io\ friiinjr C'hoii'f of 

3.VJ. Brl;;<rs y. Spiuldiiiij .... 

35.'^. Ignorance No I'.xrusc .... 

,'i,") t. Supplt innitary I'.xaiiiiiiatioiis Ncctssa 

;{,"),"). Opinion of Coil ;itroIl< r Uicitftly . 

3,')(). The I'rtsidfiit 

3.")7. 'I'Ik' Cashier 

3,")8. Payiiio- Teller 

3,-)!). Kecei\ing Teller 

3()0. Note Teller 

3()1. Diseouiil Clerk 

S(r2. 15ookkee])iii<i; Department . 

3()3. Laws Helatiiiji to ( ollietions . 

3b"l-. I.iahility of Colhet iii};- 15ank . 

ti6'). Colli etioli of Out of Town Clucks 

366. KMn-lish Method ')f Country Colltcti.- 




•J 8 3 
'J 8 3 

-J8 1- 

2 in 



nr.po.siis AND DKi'osirous 

S()7. General Deposits 

3f)8. Sjieeial Dejjosits 

36'9. Safety Deposit \ lults 

370. IiidiieeiiK iits to Depositors .... 

371. Dittieulties in Kstaiilisliiiiii- a New Hank 
."i (' c. > .iiu< oi .1 ij.tiiiviii:^ V .iriiiei'ii.Mi 

37.'". Kiteiiit; Cheeks and Drafts . 

37t- .Method of " Kiteiii;:; " 


3 Ob 



J I s, 





Title to Dt-pusittd Clit'cks, etc 

Case of lJi>[)iited Owiursliip to Deposited Check . 
Accepting Deposits when Insolvent is Criminal . 
Drawer Released from Responsibility After 


I.oeal Hanks 

Holder of a Check Cannot Sue Bank . 


Insuthcient Funds 





















Wlun a Deiuteitor Fails, His Note Not Being Secured 
Advantage to Depositor . . . • 
Sel-Olf Makes Failures Appear Worse 


Form of Note 


Two Qualities :>ecessary to the Making of ii Banker . . 

In.estmeiit Loans 

Conditions Cnder Which They Are Good Banking Loans Loans 

Capital Loans 

Capital Should Come From Stock and Bond 

Mortgage Loans 

Loans Reported to the Comptroller 
Demand Lo.ins Have Increased . 
Double-Name Paper .... 
Single-Name and Brokers' Paper . 

Judgment Note 

Collateral Note 

Risk in Collateral Loans . 
L'sury Laws 

('.•ill I.O.'VilS F.X'UOlt' d .... 

Loans on Open Book .Vci'ounts . 
i'roN iding Tt niporary Capital 


, 813 
. 313 























I 111. 

II -J. 

n I. 




1 •>' 1 . 

( il.Vl' 1 i.u XXIf. 

LOASS .\C.\lSSi COl.I. \ ri.K \I,. 

(' r,;l ('(,r H-tiik I.o.nis 

.Mtrc!i;iii!Jis, .-IS Coll-itir.-.l 

A(l\;int,ii;( ^ (if (ioixl W;irrlu>u-,inir l.,,\vs 

l.o-iiis nil M, r.-|],in(liM- a I.ciiitiinat, riuuln.ii (,t' Hank 

.'■^tatciiK lit (if a Hank i'n si(i( nt 

i.;i\v ul' Wari'liousc Hi ci ipts 

I'liiroriii I. aw 

Iii>k !n\ol\((i ill l.o.'iii-, nil WarrlHuiNf Ut-cti])t^) 

(ndrr til,- I'r, s, nt Law 

I^MK- lit 1{( ,', ;pts SaiVgiianlcd 

Proltctioii ti) H.)1(1(TS of !{rc.i|)ts 
(iarnislimciil iidt Allciu, d 

I'.nalfy for l!l.n-,-iI I'm- of Hr(Ti|i!s 

Transirr of Tijlc to [.nuliT .... 





33 1 





33 i 





'HAITI. H Will. 
CHKD.'T 1)1 1' AH r.xilAl ol \ UWK. 

lAolutiiiii of till' ( rrdit i Jcp.irtliiriit 
Sources of Crulit information . 
(in (lit .Vgfiifit'.s 

Dtitii s of Ol (iit Mm 

1 lif t oiijiiuii lal .Noll -Hroki 1- . 
C'lian^f in the Hii>sintss .... 
Dtinaiul 111(1 Supply ol' (. oiinncrtial 
Arc.i.s of Hifili and Low li.itts . 
IJisi'ounl OliVr by Dtahr . 


Size of Nottb 

cii.M'r. u x.\i\ . 
Hisroiiv Ol iswmm; i\ iiii.; rxiTF.n states. 

••.'51. ( li.iraitt listii's of Karly Haiikinjr 

••35. Rcl.itior's witli Govtrnnitnt 

i36. Historical IN rjuds 

437. Some Ivirlv Banks . 


I'J r. 




13 1 . 










.•J4 • 






kSS. I.mni.ip; nn Stock . 

4,'jy. First U.'iiik of the I'mUd Stntrs 

■1- K). Success of the !■ irst H.iiii\ . 

111. ()|)))ositioii to Uicliartrr 

ItJ. Second Hank of tile United Slat 

}-l.'l. li((li niplion of Notes in Specie 

ill. Misniana^eiiicnt of the Hank . 

It."). .Jackson Opposed to tlii- Hank . 

IK). State H.mkinp; 

11-7. Siirtolk Bank System . . 

•IIS. \<\v York .*^ysleins .... 

ll-.O. Safety I'und System ... 

450. Hond Deposit System ... 

451. M istakes of tlie System ... 
4.")2. I'"ree HankiTijj; .Systriu ... 
4.5.S. Kxperienee in Otiier . States . 

454. Indiana and ()liio .... 

(ilAl'IIR \\ 

455. The Xational Hank A<l . . . 
4,")f). Alaikrt for rn.trd Stat.s Honds 

457. Early History ot tlic Act . 

458. ('om|)tr(dler ol the ('nrrenc\' . 
45i). Sumiiiary ol Nation d Hank A't 
4(j(). Circniatini; Notis .... 
Itil. Jleserve Id ciuin ments of Nationa 


H ink Act 




:',r, 1- 





(ilAI'llH X.Wl. 

I'RKSKXT ( (»X|)| IKiNS (M l!.\XKIX(; IX Till: rMTF.I) STATKS. 

Ki'2. Tlu' l)(M !n|)!iieiit of Deposit ('nrniie\ .'>7I 

Hi3. I.iinitalioii of Di posit Ctirrciicy .■i7'..' 

[•■K Srasunal Demands ... .37.3 

4t!5. Drplelioti of Rc*crvcii .37 !■ 

4tit>. Aldricli-Vrcdand .\ct 175 

407. hi" lasticitv ^7 '< 

4»!8. Expansion of Hank Circulation S78 




l-fi!*. Lack of L'nity in Our Svstmi 

•J-Tll. Sa\iiii,r.s Hanks .... 

•1-71. I'ostal Savings H;uiks . 

•i7ii. Gliar.'iittc of IJaiik Deposits 




i7.'i. \Iark<t for S. ciiritiis in tlic Liiitrd States . 

47L V\ orkiny: ( a|>ital of Dralirs in S'c'uritifs . 

i7.-|. Di tails of Ihr Loin 

47(». ( rrliticatioii 

477. Ii( striclions on Collateral ... 

47S. C-ill Loan ILite 

l-7i). Hespoiisiljijities of tile Loin ( lerk 

180, Un(Jig)ste(l Seeiirili.s 

tSl. (lose Helaliun Hetween Hi serves ami I'riees 

iS-i. I'iaii f,.r IteniedyiniT the Dangir ;ii Hidejiosit iiig l{i 


48;?. (dnmiercial Hanks 

48i. L'inaiifial B.iiiks 




( li Al'Il'li XWfFL 
nVNKS \NI) llli; t NlfKI) SI Nil's TULXSIHY. 

!Sa. fiesponsiliilily ol t lie S( creta r_\ of I lie 'rreasiirv 

f-'li. 'I'reasiiry ( aiisi s St riiii^iaicirs 

187. I>eteeliM ( iiiTi ne\ Laws .... 

INS. I .\p( (ill Ills of tlie .^lerefirv 


( lL\i'll,|{ XXIX. 

IN'). Hink of Lnpl/in.l 

I!»''. !)e\elopmi lit of l|„ I s, of CliK-ks 

1!)!. B.-uik All ot isi 1 

l!l'2. (h.-ir/icter of Hank ol Vote . . 

ViA. Tlii H.iiik .if i'.Mnrtn.} I>ri\,iie 

IfU I'AMking in France 

40 J 




■Hj't. Bank of France 

49(i. Deposit Currency Little Used . 

■l[}~. Asset Currency 

H)8. Braiielics 

4!)f>. Imperial Bank of Germany 

:aH). Intluenee of (ioverniiient 

501. Mod. led on Bank of England . 

5U:J. Reserves 








r. 11 . 
:^ii i. 




Origin of Banking in Canad.i . 

The Substruction of tlie Canadian Baiikin 

Revision of tiie (ieneral Banking Mcasur 

Incorporation of Banks 

Tlu- Branch Bank System .... 
Conditions of Note Issue .... 
Canadian Bank Notes Based on Counnerci 
Tiu' Ct nlral (iold Riserves .... 

Security of Note Issues .... 

Reserves I'ixed liy Eacii Bank . 

Reserves Conipostd of I'our Elements 


Investiii''nt Securities 

Loans to Manufacturi rs. Wli.ilesalers aiu 

Internal Bank Inspection . 

Bank I'.iilures in Canad.i . 

Shareiiohiers' .\udil .... 

Canadian Bankers' Association . 

. • 


. 409 

ig System . 

. 410 

c of 1871 . 

. 416 

. 416 

■ • • 

. 417 

• • » 

. 41!> 

Mai Assc 


. 419 
. 420 

. 42. ■< 

^ , 

. 424 


. 426 
. . 427 

^ , 

. . 428 

d l"arin( 


. . 428 

. . 4"; 
. . 4;i:! 
. . 4:t6 
. . 4 .'58 

5 2. I. 


Brnnch Banks and tti«- local ( oiniiiunity . 
Concentr.ition i>f Hcs.tvi s in Br, inch Banks 
Numher of Banks to Population . 

!'>.-■;•.:■.•-;■! C'.!rr".'!!£ V >!• C.'ltl.'ld.! .... 
* *' i ' "~ - 

Criticism "f Bank Not. Issu.s . 




5'.>(i. Profits on T?a,.k-\ot,- Issurs 

5'J7. ExcTssiv Surplus ,„• Rr.t Tunds . Jm 

■V-'8. Profits of tl..- (■.•u,,-uiia„ Banks ...'■"■■ [r^ 

^-^9. Hank .M.rp rs an.l Anial;ra„,ations ..'.'.'"" .^^^^■ 

•^■i". Hranclirs in ]nni-n Countries ...."' 4^^ 

•■'■'l- (ail Loans in \( w '^'ork ! 

•'•'-• '. all Loans in ( anad a ... 

•'•'■■'• '■"'"•" '•"i"^' ""i I'roniotion of Corpojations ' ' 'tJ, 
.'■».'M-. Loans t,, Dirrctors " ' " '. 

5.'ia. Hanks an.! tlu Trust Con.i)ani,s . ^^^ 

r>:Hi. Cliar-rs in tiio .' 

r>:'7. Hanks ,,f .Suiall C.ipital !!, 

.'■>.•!«. on D.posits . . . ,' * L'^ 

.''•'i.O. FinanciriiT tli.' Crops ....*.' ^i! 

r-M. .Mo\in« til,' Western Wheat Crop . • ' ! ' ' ' 4-1, 

r>il. (^^'ommereial L.tters of Credit in Canada . .' * ' '.jl- 

.'"'I-'. Cinadian Clearin^r 11,, rises . . ••••/( 


TFIK n.WKS AM) THK .,/Vi' "{NMK.nt. 

.'iLS. flovennnrnt Ndt.- Issu<'s 

r>n. T.-ixinir tlie Hanks * ' 

M.-,. Montldy Statements to ti.e Government . . " \i)„ 

."•K.. flovernnient Postal and Savin-s Hanks ..." * ' ^qr, 

.'ii:. C|„aper Affrieiilfnral Credit ' tqs 

r>i>i. Co-operative Cndit SoeieH.s .... " " /' 





1. Reasons for Uic stiul// of inonri/ and Ixiiikiu^. — 
The study i»t' iiioiua'. I'unriu'y and hankiiio' is iieccssary 
to every person who desires a thorou^h<^'oing knowledn-e 
oi' business. Kvery one who has to deal with prices, 
w hetlier he be a prochieer or a eonsuiner. a working- man 
seHin<i' his ser\ iees or a capitahst neeivinj^' interest on 
his investnient'^, in order to oonthiet liis atVaii's intelh- 
yently must understand llic forees alfeelinu- |)i-iees of 
tlie commoihties or the services in whieli he is inter- 
este(k Kvery Ihietuation of price allVcts the welfare 
oC everv person who buys or sells, and the ability to 
I'oresee these thietiialions enables the business man to 
avoid loss and ^ain profits. 

The s('<n('e ol' money and l)ankin,n- deals v\i'h jjriees. 
and attempts to explain thiir tluetuations so I'ar as the 
cause of tin sc tluetuations is due to ehauHes in the con- 
ditions of currency and hanking-. TIk inlhienee of eur- 
rciK-y and bankin<4' upon prices is much moi-e unporlaMl 
than is gciKM'ally supposed. 

Kverv brsincss man miderstands tiic Ihieiuaiinns of 
tli.ii .ii-j. !.!',,!!"ht ;!b'-i!!! !.'\' alt( ratiiu's in the siiiiiijv" 

price t! 

of or the demand for commodities or services. 

VII— I 1 


a MO.NKV AM) l$A.\JvlN(; 

knou s when five nun arc hi,l(li„o- f,„. „Me article that the 
price will o,, up, and that wlien five sellers arc ()frerin<r 
their goods to one man the price is hkclv to o„ do^^n 
He is not hkely to u-iderstand. however/ how prices in 
general nuiy g,. up in conse(]uence of a new (hscovery 
"f gold m the Klondike or an increase in the amount oV 
I'ank outstanding, ^'et these hitter forces are 
.inst as pofrnt. and even more enduring, than the former 
in affecting jxiccs. 

To offset the enormous (himage chargeahle against 
the panic of 1!)()7. mc must place on the cre.h't side of 
the account an item whose importance is hecomin-.' more 
and more apparent. This item is the education")!' the 
Anuncan business man in the science of currencv and 
l>anku,g. at least to the extent that he appreciates as 
never hefore the relation between a defective currency 
system and his own prosperity. lU feels that much of 
the loss and suffering of that .lisastcr was unnecessarv, 
'••"! that m tlu^ luture the severitv of panics mav be 
consi(leral)|y mitigated. 

U an architect should plan the construction of a 
l>nd(hng which collapsed in the first severe storm he 
would probably be lu Id for criminal neglect in .jisre- 
.uanhng the ja,vs and principles <d' sc, ntific cnstnic- 
f'<".. Shouhl not the architects of our currencv a,.d 
''■Hiking systems be held e.,ually responsible for (he i„l- 
lapse ..f their structures when they have .lisregarded 
scieiitdic i)riri(iplc.s clearly established:' 

The study of the science of eurrencv and bankin- is 
"<'l o,dy obligatory upon the archit.rts ,,r ,,nr rnnu..t"rv 
system, but it is also profitable tr, those who must adap't 
their business to existing sysleTus. I f the system is de- 
'.'"'■ "'''■• ■■'''"'' '^fiow ]),,n iu escape Uu' eoiise(|uences 
ol such defect.s; they must know enough to move out (.f 

1 r\i).\.Mi:N'r.\L i'conomic c()N( i:i"rs 

the huildiiii^' when the iirst cracks appeal" in the walls, 
or when evidences of a storm are manifest. 

2. ]\'(inihti::s of Ihc IHu; jxinic. — During- the winter 
of 1I)()() and tlie snmmer ol' liU)7 the economists and 
stndents of finance had sent out hulh ins of warnini>' 
and displaye(' storm signals of the ap])roachirii4' lroul)lc. 
'I'he intelhu'ent na\ iyator of husiness craft who could 
undci'stand the siwiiifieance of these si^iials sailed close 
to the shoi'c or kc|)t in poi't. while the iieedless and igno- 
rant put np full sail to take adxanta^e of the hi'ceze of 
prospi'rily. and found themselves cau<4ht iiiun\ares iu 
the s(]uall of Octoher. 

'.i. SciciiCL'. — Science is the stud\- of tlie I'elation of 
cause and efl'ect. Man has an inhorn curiosity to know 
(he reason foi- thin<4s. in oi'dei- that he may he master of 
his cnxironment and that lie may know how to produce 
desired effects through his jjowir o\ei" the causes pro- 
(hicini>' those effects. 'I'henl'ore. our ultimate aim in 
Situdyin^- the sciince to which \sc \vd\v addi'csscd our- 
selves is to he ahli' to make use ol' such knowledn'c in 
increasing' our husiness efhciency. and a\()idin<.i' waste 
of' elfoi't in materials thiou.uh iynorance. 

Money and Hanking' is a pai't of the scitrice of finance, 
which in tui-n is one o\' the hranches of the more ^^cni'i'al 
suhjeet of I'A'onomics or political economy. 

1-. Finniicc. Political Kcon<tmy is the science of 
husiness: that is to say. the science of the relations of 
men with each other in the jjroduction. consumj)tion. 
distrihution and exchanu'c of uoods. l*'inaiu'e. one of 
llie sididiv isions of llie lieid of economics, deals with 
conlrol of property, (sp(ci;dly with that form of |)rop- 
ei'ly which economists c.dl the production aoods. '. c. 
land, natural resources, factories, ra.ilroads, machinery, 
etc. Control of property is attained tin"ou<ih chan^'es 




."' ""',"■"'' '"• i'"-«-M.,„ „r II,, i,ij,,|,„t,,K-v 

'", '''■'"''"■'"■" « I»- l'"'»"cr. thc,vr„rc, is a s,.!,,,,', 

"Im-I, t,-,.ls „r II,.. .«c„,l,li„«- a,„I ,„„„aKc.,„.nt „f c,-,,,- 
' "I. .-."Htl,,. I, ,■,,,;,, ,1,, |,,.,,,,,|,,t ,,,,,^, it„|,„jj^^ 
"' !■<■ "rH,.., Is ,„„| ,„.s„,,„„.„,s „s..,| „„.c,ssan- t„ tl,is 

;■'"'; '""7 ""■''"'"'"■ ■""■'<>■ '" m,ki„K. M ■„,,. ,„„, 

';"''^"'«-''" "lilii'iMsIr .■nts,„„l,„..fh„,,;,„„,|, 

'"■ ..«v,„-.v „r ulnH, II,.- ..x,.l,a„,„,, ,„• ,„,,,,,,,,, ,„. ;;„ 
l-.Hls ,s a,v,„„,,I,sl,..,|. Tl,..„m,„„|,.„|,i,,,„|.;,|||,„,.. 

"" ''■ '"" l""''"<'f '■■ ll'^' .■"„s,„„..,.s. Wealth i, 

"';■. f'"'™ *;■'■ I"'-'' -'-I'"!-- ^.n ,„at,,-ial tl,i„„s 

tl - tl„„«.s „|„..|, „„,,„, H,c. .,„alilv ,,,ll.,| „tililv 
» "c . ,s .,,,,lv ,1,.. p„^^^^^^^ 

' < > .;.■ „„l„-,,-lly. In .ml.T In ,.,.,,,tr Ihis .|„ali,v „f 

;;'''''>,;■' '''^''7';'''|"''«-fisM,.,.ssa,,v -i,,,! „,.,;, 

t V U „.s: lal,.„. „at,„,.l ,.., -.vs. a,.! ..a„rial :.„„|, 

1 l"s la t,,. t.™, ,„..i„,U, all tl,.. a,-tili..iai i„sl „„ic;ts „f 
;"■"''"'"■;";-■- l."«.. ,-ailn,a,l.s-„hie|, l,a 

.-.. Ta-I,„„hg,i ,„„J 7.„.v;„,-.v,v.~ I„ ,,.,;,.,- <.nlcrp,-ise 

'-:•■ -\t"" ''-'"-t -1.- ti-t is. a t,,.i,,,ical ,U 
-- -k. Tl... ,„a„„ra,„„.,,. ,„„.| ,„„ „„,, ,,„,, 

; '' 'f^- "'^ •'"■ ''-^t ""'l-ls ".1.1 l",..s r,,;. tun,. 

-K "..t h.s ,n„l„.,, I,„M,, „,„s| k„„„. l„„v t ,,,, 

'"•■' .na s |,„... |„s ,al..„, ,,,,„, „„, ■ „,,^, , .^ 

ilJI.I sell |„s |in„|ii,.|. >^.i|MUH 

"■■•■"""""'■■. has ,„,tl,i,,o. I., .,,,,;,,,, I,, |,.,.|,,,,_.^,, 

.' '"•'"'«■ I"' -il,„aon..„i|,„,, ■„,ll,,h,.<.„„stmo- 

";.i"l...a..h,n.. i„,„a„,„a,.„„i„„.. ft ,.„„fi,„.s ils" 
■|"c,.v t„ u,, si,„iv ,„ II,, ,„.„,„„.ali„„ „„,| ,,|ali„„;„r 

"'^' ""'"■ '''^''o'-^ "'■ l""'l"<'<i"M. Ia,i.h nal,„„| ,.,s,„„.J, 


FrNDAMKNTAL i:(()N\).MI( (ONC Kl'TS r> 

and capital o()()(ls. If cxcrybody {)ro\i(lc(l I'or his own 
wants first, hy ])r()(luciii^' what he coiisuincd, there 
would l)e no such tiling as husiness and eeononiies. 
IkisiiRss he<^ins the moment one peivson prodnees some- 
thing- for another hut de|)ends upon another to supply 
him hy exchange with the things he needs. Since i)rac- 
tlcallv nohodv is economicallv self-sutlicient in these 
days, cveryhody is concerntd w ith husiness jji-ohlems. 

0. liitsi>i('ss iJic rcsidf of spccudrjiiUni of labor. — 
This fact of the uni\ crsal division of lahor or specializa- 
tion of lahor is the vei'v foundation of our eeononiic sys- 
tem. The ])rocedure of a modern man in supplying- ifis 
wants is \ery indirect. If he hasn't some already, his 
first move is to supi)ly himself with money which he ex- 
chanyes for the ^fjods ^ith the merciiant. The mer- 
chant has previously ac<|uired the ^oods in a roundahout 
May tln-ouoh the channels of trade from the ])i-()ducei's. 
The producers ai'c organizations of men who take the 
material.-, fi'om their natural state and work them up 
into finished ^'oods capahle of satisfying- human wants. 
The work of the world, in which we ohscrve nearly 
e\ cryhody so I)usily cn<>'a,i;ed. is ])i'0(hiction. Sometimes 
it re(iuires very close anal\sis to discowi- how some 
occupations assist in ])repariny noods foi- eonsumj)ti<)n 
and use. At fii'st siyiit such occupations as l)aid-:in_u'. 
hrokera^c, accountiiif^-, etc.. st'cm to haxc little to do 
Avith the production of <^()ods. and yet as we shall see 
Curthei- on, they arc as neccssai'v and elfective to this 
end as aoriculture and inanufacturin<i-. 

7. Product hill. — To create the greatest utility in 
;4oods that Is. to <x.'vv them tlu- maximum powci- to sat- 
isfv liuman wants, thcx- nmst he oixcn th.e nroiirr fonn: 
they must he ready foi' consumption at the ])i-oper time 
and in the pi'oj)er ])lacc; and lastly they must he in 



M()M;v AM) B.WKlSa 

:.^::^::;;;;:;::;:;:::;t:;';:,tr''-'''' "- 

;;■'-■ ^-K' to „,,.,H,..,.,,,,,i,,,,,,-;,;;:;;-;;;>""^;^-.n 

P^'-sons maU. utility just -is n '"""• "'^■^^' 
>;''^"'^ '■""'^■••<'>-tIuM,uniuradMrer. 

"i.y-. Cnd 

money and hank- 

'" *''^' amount <./• utihfv -f i' r ""'"'^ 

<IIMII\ at IIS ( isiKwi TI ' 

tHH, c,l- exc-han-.e is reh,fiv< K- ' , '"^;*''- ' '"^ "P^'ni- 

"-Ha ,'.,,17: ^'.';: :'■■','';";'.''- '"'■''-■"•'■"■"piish- 

vicvs. ' ■"■'""""■"■• iiii.i ii,j.viij,,,,s iIl- 



All our modem material civilization is practically due 
to the extension of the principle oi" the division of labor. 
It is only Mithin the last century or two that the whole 
])opulation is ennaurd in producin<r things which they 
do not intend to consume. The enormous increase in 
elHcieney of this method over the methotl of each ])r()- 
duciiio- for himself is instantly a])parent when we reflect 
on what portion of the wealth which we consume daily 
woukl he ours if we were ohliued to produce it hy our 
own unaided eiforts. Now this whole system of divi- 
sion of labor depends upon the exchange of uoods. 
The products must find the consumers, and this involves 
from one to one hundred chani>'t's of ownershij). There- 
fore we see that our modern civilization has been de- 
pendent upon the growth of commerce, and future 
developments in the division of labor will depend upon 
tiie facility with which its various classes of conmiodities 
can be exchanged. 

9. Tardji recognition of value of iwchnngc. — It is a 
curious fact that this most vital ])art of civilization and 
commerce, money and banking, has not been understood 
and ai)preciated until recent times. A few centuries 
ago, the merchant was regarded with susjjicion and 
})laced not far above the thief in the social scale. Tiie 
luerchant who bought an article for $1 and sold it for 
$E.)0 was thought to have robbed the purchaser of .)() 
cents. The banker who loaned money at interest vio- 
lated one of the laws of the church which forbade taking 
of usury, as interest was called at that time. Tt is 
oidy in very recent times that the ])ersons who perform 
this most vital economic function of exchange -the 
bankers, financiers, brokers and merchants — have been 
understood and a])])reciated, and even yet we find the 
medieval idea still j)revalent among a large class of peo- 

-Hon :.:::: rr^-:;:::;: ••:,['";:'-■■■-" '-^- 

"■Iv. ir uc t-.k-,. ., ' ''"'''"' Pn>atu |,ro,. 

an,l „tili.„ti, !• ' , ■ •" ^"•'"■'' *!«■ I>"«,„ 

'■'"'•i'"" ..(■ llUM,-m ,.,,.'',•' "I"'i""-"t'>l-tl..- lull 

I>er.s,>„ Is „c.,ltl,v. „e nn.,,, tl,-,t I "" "">■ " 

--.''■™ii';;:;;i;,:';f:^ rT"'"-^- ""^^'""' - "-»>■ 
"r'- -■-'"; ::^:"..:n::'':: ;::::;;:::■- 

'" "■"""""'■ s.rvice of the uier- 





sliarc of c()r[)()rati()n stock is a claim to a certain portion 
of tlic cariiiii<^'s ol' a coi-poration set aside by the direc- 
tors as a\ailal)le for dividends, and in case ol' llie dis- 
solution of the corj)oration, to a portion of the assets. 
A I'nited States note or <^reenhack is sini|)ly an evi- 
(K ice of a claim against the (io\ernment for payment 
ot' a certain number of dollars on demand. The fact 
that it is readily accepted by evciybody in exch'ui^e for 
wealth does not make it real wealth. 

A ^'old coin is wealth to the extent to which the 
meta. it contains has utility. In the case of all the 
other forms of money we are con {'routed with a prob- 
kin whether to classify them as real or rej)resentative 
wealth. Money undoubtedly has an indirect uHlity in 
so far as it assists in ])i-oduction, and would seem to ^o 
alon^- in the same cate<.>;oi'v as railroad cars, wiiich in- 
crease the utility of noods by niovino- them from place 
to })lace — money increases the utility of goods by mov- 
ing them from owner to owner. 

\\'e have seen how the division of labor, where nearly 
everything is the subject of pi'ivate property, recjuires 
continual excjianging of wealth in order that it mav 
.'ome under cr-itrol of the ])erson.s wlio can best utilize 
it. There is another conseciuence of tbe division of 
labor: It re(juires that the factors of ])roduction l.e 
organized in great groups, in order to be most effec- 
tively utilized. 

As the result of this tendency, we have tbe United 
States Steel Corporation, with its 1.50.000 men working 
with a billion dollars' worth of natural resources and 
ca|)ital goods, and with the ])roduction of iron and 
steel. This grouping together of a large number of 
industries. (M-iginally indej)endent and sepai'ate, has 
eliminated a vast num))er of e:" i anges. From the ii"on 




ore at the to the finislicl steel rail there i, „„ 
ohnnffe„f „„Mer.hi|,„(li,e,„„t.™ls 

1^. l„lc^-c,ti„„ of /„,/«.„,/.. .\, :, e«„seq„ence of 

tl'; ' l>d„,e. I he ee,„„„„y „r ,|,is i,ileK,ate,l te.ulenev 
-I '"'■ ""..e a,,,,a,e„t ,vh.„ „e have learned h.,« i , ^ 

la,l, „ ,„ I e „„,.|,a„,s,„ .„■ exehanse t„ w,„-k ,„■.,,,- 
ulu As >ve .l.erease !h. ,„„„he,- „r exehanifes in lie 
'"■■'"■'I l;™ ..H,o„. we .educe hy s„ ,„„eh Ihe ., lo 
tiiiiitas l„i- hreakd.ivviis. ™ 

These |-,mda,„e„tal ee„„„,„ic faets a„d |„i„el,,les are 
n.ent„aK.d I..,,. , „,„,,e, he anient a, ,,■.,,,',. i.lea,,r the 
!'"l-lnal syste,,,. Voney is an h.str ent an.i hank- 

Ik -ehy n,e,.ease the n,a.e,iai n.llare of ,!,. ,„,, ij 
'■!;■;'""'■"«"- -l'en.sal,l,. .,., s ,„■ , 

;;""■" " "•'■ ••'" ""-■ vr .live e,r,„, no. ;;j 

H al,ae,..n,d'i,se,liea. ,. V, hieh « e sh, . 

stdl he ,„ the state ,W indnstna! harharisn,. 

'';."'"' "*"l"-iv.'de,. rn,,e,-tvi.n..t. as a sreat n.anv 
"','"'' ""•'-'■':• ""-'^-m the hnn ,ni„d: I? is a ,„, i 

neral *", li""' '"■""'""" '""'''''^ -.nnnnnsn: is 
"' ■"■™'l""" ^M-"liarly personak The «,., 

''•'"«"' "-'^ '"'"" I'vidnals, hn, heU.,,,, 

^tr:jr\''"T'''''"''" l«i'-'--liH.lhana„v 

coiitiMC't of ,fi//(f pro qiu). 



1.*}. Ec^;lnnin^ uf cvchuiigc. — lU'^iilar cxcliaiige did 
iiot t xist until oiu' tribe had a .surplus ct' j-articulaf com- 
inoditii's wliicli were desired by the tribes lia\in^' no 
facilities for produeiny- tiieni. These artieles, which 
W'-re sui)erHuous in the tribe j)i'0(iuein^- them, had a j)e- 
euliar vahie to olliei- tribes whieh ])erha])S eould not 
produce them at all. If Ihese commodities happen to 
be of an imperishable nature, as pottery, weapons or 
furs, they mi^iihl easily come to have a ux' as a medium 
of exchange i'or home products. 'I'he necessity of ob- 
tainiu;^- such commodities from otlu r ti'ibcs gave IIk lu 
;i kind of lixcd \alue, and thus llicy became the most 
convenient standard by which the xalue of all other 
thiniis could be compared. 

In the c\olulion of nionex a \ast numbi r of thin;..?s 
have been used foi- tlu |)urpose of tixin*;' \alues. but 
practically all of them represent sinplus products which 
could be exchanged with foreigti tribes or nations for 
imported wares. 

Ivxchanging of goods within the tribes was a \('ry 
slow development, and when it did dcNcIop it was most 
natural ior these articles ot' foreign origin, with a fairly 
<!( finite exchange \atue already fixid, to become the 
common mt dimn of exchange and standard of \ahic. 

r>\ >>Miii authorities economic history has been di- 
vided into thi'ii' stages, aci'ording to the method by 
which exchanges were made: liartcr, money and cicdit. 


r T7 



^"IM.V .\M, liANKix,; 

III llii^^ tirst or ■■|,:„.|,.,." ,, 

.«""il^- III tl,.. sc-c,„„l , :f *"";- "'■'■'■ '■«'l'»'i«"l l',,,. 

■■.".■-•ii.,,«x.a,,iii; ".:«r ;:::'■' f '^ ''•"'- i-.! 

■iianwii.iiiiv ,, ;V '''"'^''''''''■"'■'I'ltiiitv .f„. 

^'---l^;™^, ■':,;';::■''*"'',';'■ "*'«-..,„„• 

'"•Ills. t„l,a«-c,, etc ,■.,„„, t„ I '■'■ "''"'"■ 

<"iii<' f" the „| ■,,|,„.- ,1 , ■'" "'■'■ "''"I "<■ 

'■^"■'■"■■^"IlK'l, C.„,|-,.sv ■ "'■ ll„. |„.i„,i,,,i 

extra exd,„„„e , ^ " "" f .""'^ '^ '"i'".- This 

14 liar I '1^1 r 

"'■ ^'i'p'"V"..ii> . :; ':;:r^^■ t;^'''«"' -^ 

''•■"^i..V,va,-h.,r, ',"'"'''' '"''■l""^'l''»cc 
'<■ iiiiliilus k "^^ 

'-nH,st,h,,i.„n., ''::''' ^'" '■■•■'•''■ '"'■<■ I. 

''"Ki.'i«M"i.i,Hi..d ,,!,';:.';;'■'■■ ~ "'"''''''■''« '-i- 

""• I'"". !■> .1 UK , , .1 ;','"'■ ''"■■""">■ "'■ '"'"I ^1' 

'-■i--^i«v, ;r ,:';■''■ '' '"""""■■'• '■•"ic 

'■-■'"ill iimi ii , ,■■ T "■"' '" '•'""'^^ -"I '"I- 

--..■ .'.::: an-: :';'■'"'! ■■ '■ "■ ■- 

t.. Ml ,■ ,1 „,,„„,,, , .■ " ."•'■■ il-«.ll.l".IS |-,„- „„„ 

-■-■-iti., ;;: -''"rv ■■";■''••'''«'■ * '^"'■"•^' 

np„„. ■ """•' "'-""''I ""I I- .l.:.,n,k.,I 

15. Moucif.-^ M,„,. .. : 




])nt wlicn it is cxdmn.ucd for other coinnuxlilics we do 
not call the operation hai-ti'r, although it is an exehan^-e 
of ,ii<>otls for <4()0(ls. 'Llie I'aet that one of the ex- 

niaed articles is accei)te(l solely beeanse it can so 
easily be exchanged for something; else whieh the hohler 
reallv wants for nse or consun!i)tion, introduces an en- 
tirely new principle. 

Trachnu'. whieh was so limited, clumsy and iniccrtain 
ill the stat^^e of barter, now beconu s easy and irnular. 
If 1 have somethinu' of vahie I do not havi to look 
ai)out to search out the person who not only wislies to 
])ossess it but who has somethin<^- whieh I need. I have 
simply to tind a persor. who has money, because I know 
tiiat by accepting- n..)iiey I can «jet whatever 1 wish with 
it. Kxi-han<rcs, therefore, become three-side<k I'irst, 
the ti'a(lin<4- ol" g-oods for money, and tiien of UM.ney for 
o(„y,is. The first part of ihc' operation, the exclian<iinn- 
of uoods for money, is but the lirst half of the comi)lete 
exchan,ur. Tiitil the money has beei; pent there is a 
sus|)endi(l exehanuc. AvhiJi nmst lie t. mpleted sooner 
or later by the exehan«4-e of the money for yoods. 
'I'hercforc, all trade is finally barter, and the use of 
one commodity in this peculia ■ way as money compli- 
cates, but also o-reatly facilitates, exchanging- ol" goods 
for <>oods. 

1<). Minu'n represents incomplete crehau^es. — All 
money existing at this moment rc]u-escnts incomplete 
exehanu'es. Hvery ijosscssor of it will soont i- oi' later 
otfer it for goods, because money has no use ixeepl to 
be spent. 'I'herc is no utdity to be had from it until 
it is |)art('d with. i'he miser perhaps realizes a i-ertain 
satisfaction fiom the mere jjossession of monew but 
with, the r:ition;il iierson the possession of money repre- 
sents a posti)on((l satisfaction. Quite naturally the an- 


M()m:v anf) banking 

ticipatioii nl' future satisfaction to he obtained is (j-iite 
pleasurable, but to say that thr money rather than the 
aiiticipation is the source of the satisfat '-On is to fall 
into confusion of thMonht. 'fhe boy with the circus 
ticket in his hand is d with joyous sensations when- 
e\er he gazes upon n, A railroad ticket to California 
conjures uj) the sniell of orano-e o-roves and other de- 
lightful things, lint neither of these thinos is the real 
source of the gratification. The miser is the l)oy who 
prefers to miss the circus rather than to give ilp the 

17. Credit, a postponed /xiz/meitt of m one //.There 
is a third stage of economic evolution bcyniid barter and 
money— the credit stage. .Tiist as exchanges were lim- 
ited and chimsy in the barter stage, necessitating the in- 
vention of money before men eouM s])ecian/e in |)roduc- 
tion to any grewt extent, so the time arrixcd. in the 
Middle Ages jjeriinps (although Hie use of eredit was 
not unknown in the ancient world), when iiKMiey. e\ en 
the most !•( tilled forms and systdus df money, liecame 
too cumbersome. 

In this last stage exchanges can l)e made NviHiout the 
use of money at all. A man uv.y be ;ii)le to buy and sell 
without |)ossessing an_\ money, or even ;'.ii\- [uoperty. 
The consideration he gives may be merely a promise to 
pay money or its e(|uivalent value at a future time. In 
this last stage exchange frees itself entirely from former 
limitations and under speeiali/ation of industry can ex- 
t< lid liiitil scarcely any man |)roduces the thing he liim- 
s( If consumes. Kverything is i.rodueed for the market, 
■•ind the market does not fail so | as the maeliin- 
er\ of credit is working sniootlil\. I 'nfortunately, 

ci'cdit Is lil.i' fli-/. .iilI ;♦ :.. ..11 -ii • 1 I . 

■ ■■■-"; :'~ "..-■. :'. .; I ; ; ; ii ii',' i "i">iiri i'iSK, i>ur 

iiolx ly w,.nl,| think of foregoing the use of tire j)e- 

i:x( iiANcii: 


cause liouses sometimes burn down, nor would auyl)ody 
advocate the abolition oi" credit because .soinetinies its 
abuse brin<4s on coniniercial ilisasters and panics. 

Throughout tliis book the word •Y're(Ut" will l)e used 
in a strictly technical sense, that is to say, with the fol- 
lowiiio- niJaniuir: Cmlit is a fiostponcd pajimcni of 
mniu'ii. The word is employed in ordinary nsa^e 
to mean the ability to borrow. Thus, a person has 
oood credit when his reputatio?i for financial inte;'^- 
rity makes it easy for him to borrow the funds or i)rop- 
(.rty of others. Much of the ditliculty and confusion i.:- 
herent in the discussions of credit j^row out of this 
va^-ue usa<re of the word. If it is kept in mind that a 
cre^lit is a perfectly definite th.inw-. i. c. a i)ostponed 
l)ayment of money, clear thinkin«>- will l)e possible. 

bur definition imi)lies an ineomilete exchantrc. One 
side of the exchange has been comi)leted, but so far no 
c(iuivalent has been rendered. The payment has been 
postponed. It is convenient, however, to re«rard the 
credit as itself an tMiuivalent and a thiiio- having' value. 
If a merchant sells a bill of ^oods to a customer and 
agrees to po-ipone the payment for three month.s. he 
has received foi" the ^cxxls a jjromise, which is valued by 
liim as the full ((luixaleiit ol the ;^(„)ds. If this j)rom- 
ise is put ill the form of a promissory note (which is 
simplv a documentarv evidence of the promise) this 
])romissorv iiote is a concrete object ol value and can 
be itself exchanged for other things of value. 

IH. Cirdits as media "f twch a iifrc— The fact that a 
promise to pa\ moiuy i< a xaluabjc thing in itself sug- 
gests immediately the possibility of using such promises 
as a medium of exchange if they can be put into such 

I • • 1 1 ■ I i :i t I , i I 

form iiiai iiie o\\nei>iiij» iil Tiuui .;;" ;;;;■ ;; ::• ;;.■ ;::-::: 

can be trans iVrred from hand to hand. .lust as tlie 



value of nionty is an aiiifit-ial (jiiality, created by its 
ready exeliaitoeal)ility, so credit may come to have a 
value for l!ie same reason. People accept money read- 
dy in exchanoe i'or anythino- else because they know- 
that it n-ives them cf)nimand o\er any j)iece of |)ropertv 
that is for sale. In other words, because it i.s converti- 
ble into ])roperty practically at all times, in all places 
and under all circumstances. Likewise, credit has value 
as a iiudium of exchange only to the extent to which it 
is convertible into money or directly into pro})erty. C'wii- 
vertibility is iherefore the very essence of the value 
oi' money and credit. 

Money we saw was simply an indirect barter, the op- 
eration beino- len<«thened by the use of an intermediate 
tiling- called money. AVith the use of credit the o})era- 
tion is stili fuither lenotlimed. and the steps in the com- 
plete transaction may run as follows: (ioods are traded 
tor credit: credit is traded for money: money is ex- 
channt'd foi- yoods. 

Sui)pose a mc'cliant buys a bill of dry-<rood,s fiom a 
wholesale establisiimti't and ^ives his three-months note 
therefor. The w holesale house may take this note to the 
bjuik for discount, reeeix in^- a credit on its deposit ac- 
count. \Vhe?i the note is due tlie bank may receive a 
check from the retail merchant who made it. This 
cheek may be cashed at another bank and mav be i)aid 
out auain to a manufacturer, who has received a check 
from the wholesaler drawn aoainst his deposit at tjie 
l>ank. Tile manufacturer may use this cash to buv 
cotton from the eustdtuer of Hie niei-ehan! wIk. consumt's 
the dry-o'oods first bouohi. Kedueed to its simplest 
terms, the cotton urow. r has bartered his cotton for, i)ui liie iransaetion lias in\()j\ed a very compli- 
cated series of exehauMCs in ordei to accom|)lish it. 






This c'onipk'xity iiitroducca hy the use of money and 
( i-eail ^v.)ul(l seen'i to inercase the ditlL-ully of exehan^- 
i in- goods for o(„)ds, hut in reahty it facihtates the proc- 
ess hnniensely. While seeniin-ly the most expensive 
mode of making exchanges, in reafity it is the most eco- 
nomical. The profits and salaries paid to the merchants 
and l)ankers are added to the cost of the linished clolh, 
and the planter must give so much more raw cotton for 
it. hut if these middle men did not exist it is likely that 
the i)lanter would have to manufacture the cotton and 
the cloth himself at a hundred times the real final cost. 
This is a case where the most indirect route is in reality 
the shortest and chea])est. 

10. Mducji (111(1 credit rcpresrufdihrs' of xccalth.— 
Monev and credit are representatives of wealth rather 
than real wealth, l^iis statement seems to inxolve a 
])aradox because of the hahit which lias been ac(iuired 
of regarding as wealthy a person who has control over 
a large sum of money or credit. The ])o|)ular concep- 
tion i)f a Mcalthy man is very likely to approximate the 
caitoonist's idea of a rotund individual wearing a sdk 
hat and a costumi" witli a dollar-mark pattern and sur- 
rounded hy bags of specie. 

The wealthy person in reality is one who has control 
over a large amount of goods or real weallh. How- 
ever, in est: ' .ding- wealth we find it convenient to reduce 
it to a sum of dollars' worth rather tlian to enu- 
merate all the items of goods contained in it. A mil- 
lionaire is not a person who owns a million d(illars in 
UKMiey. but whose properly rights are estimated in lerjus 
of dollars. The millionaire may rarel> have in his per- 
sonal possession more than a thousand dollars in money. 
j)iil because his proi)erty rigliis are more or less iwii 
vertil)lc ifto money we fall into the error of carelessly 
VII ,> 



consideriiio- I'm as possessed ol" a miilioii dollars. Un- 
less we think elearlv on this point and rid ourselves of 
this error, we are likely to find ourselves hlocked in 
dealinn- witji problems in money and hankino-. 

Tile value of money. e\eej)t in the case of metal coins, 
which have a commodity utility, is dependent ujk)!! its 
convertihility from property int , ooods. If ever,\!)o(iv 
attemi)ted to convert the money and credit in the world 
into ooods simidtaneously, money and credit would lose 
its value entirely. It is oidy hecause there is a real need 
for this ))aitieniar kind of utility in makino- exehan^res 
that the value of money and credit is maintained. The 
value oj' money and credit, then, is dependent entirely 
uj)on a habit which })eople have of accepting- them in 
exchange. When there is any reason to doubt that 
money and ci-edit will be accej)ted. we find its value 
shrinkino- away and are confronted with the phenom- 
enon of a dej)reciated currency. 

20. Classification of tccal tit. -There are two kinds of 
economic <roods: 'C'onsumjjtion nj-oods," which have 
direct utility and satisfy a iunnan want, and "production 
^■oods," which have indirect utility and assist in pro- 
ducino- consumption <j;-oods. The vahic of production 
li'oods is entirely dependent upon the c()nsumj)tion broods 
uhich they help to produce, /pist as the value of labor is 
d( rixcd from its product. If production .^oods or lalfor 
IS so limited that it can produce only ^^uods which have 
no market value, they are themselves valueless. Work- 
men may be e\er so skilled in certain lines of work, but 
if the product is unmarketable they will look in vain for 
employment. The maeliine luay have cost $1().()()(), but 
ne' crtlKless may be thrown upon the scrap Jieaj) to-mor- 
row ii tile product eeases to ()e purchased In consumers, 





or if aiiotlur iiiacliiiR' is itivcnlcd for doing the work 
more fhcaply. 

21. Kntrcprcuvur ■'■■//stcin.- rroductioii reiiuires tlic 
cinployniciit togvtlifr of land, labor and capital «;oods. 
rndcr tlie cor)])c'rative systen) tlie owners of the cai)ital 
ooods and of th.e hnul unite with the hil)orers in the 
pnxhietion of a certain conmiochty and divide among 
themselves the pnuhict or the i)roceeds of its sale on 
the market. 'Fhis system of industry has been found 
kss satisfactory as a ride than the cntrcprenenr system, 
so called. l)y which one man. the entrepreneur, under- 
takes the responsibility foi- the industry. lie contracts 
at a fixed rate of comi)ensati()n for the use of capital 
and land, and hires his labor at fixed wages. He en- 
deavors to reali/e from the enterprise a larger net sum 
than the payments he must make to the workingmen, 
the capitalists and the landlonls. The difference he 
keeps for himself as his ])roiit. If there is a deiicit 
h- suffers the loss. As a rule the entre])reneur, before he 
can make contracts, must have a certain amount of cap- 
ital of his own as a margin against loss. Otherwise, the 
cai)italists. workingmen and landlords must have an ex- 
tra remuneration for the risk they take. In dealing 
with a capitalist the entrepreneur does not borrow ma- 
chines or other forms of capital goods, but he borrows 
a certain sum ol' money or purchasing power which he 
c;in convert at will into jn'oduetion goods. The cap- 
italist has funds or pin-chasing power to loan to the 
entrei)reneur. This purchasing jjower rej)resents a 
c'laim on goods in general which are for sale on the 
market. When the entrejjreneur borrows these funds 
he immediately uses them to claim whatever he needs 
in his business. It was not the money he wanted, but 




the buildiii, % Ihc niacliincry, niw materials, etc. Money 
is not necrssary in production: it is siiuj)iy the most con- 
venient way of oettino' control of the tliin«4S needed. 

22. Capital. — The conception of capital is one of 
tlie most (h"(Hcult and confusing- in the whole science of 
economics. Just as in the case of wealth, most peofjle's 
idea of capital is a sum of money. Tntil recently most 
economic writers used the word "cajjitar' to include not 
oidy money, ])nt everytiiinn- wc have called jjrodnction 
^■oods. 'Vhv lundamental idea in the word 'cajjital," if 
it be analyzed closely, seems to be this: a source of in- 
come. The Kskimo would call his canoe a part of 
his capital because he could attribute to its use in fishing 
a certain proportion of the day's catch. This pro})or- 
tion might be measured by the amouiu .>' fish he could 
have obtained without the use of the canoe. If he could 
catch five 1'1'sh without the canoe and ten fish with it, 
the canoe might be regarded as the source of the income 
of five fish. Capital, therefore, has economic im])or- 
tanee only as a soinve of income, and its value is en« 
tii'cly proportioiiate to that income. 

When men reached the stage of calculating income 
in dollars' woiih instead of in specific commodities, then 
caj)ital. the source of the income in dollars' worth, be- 
gan to be regarded as a sum of value rather than as a 
machine or building, etc. 'J'herefore. we might say that 
cai)ital is an abstract conce])t of the value or dollars' 
Morth appertaining to the source of an income, whether 
.such source is tangil)lr or intan<>ible. 

The merchanl itgards as his ca|)ital his stock of <roods, 
his store building, and fixtuns. I)ecause they are tlie 
souH'e of his money income. If he ^' ere asked to niake 
a stattnient as to his capital, be would sum uj) the 
\alues of bis business in terms of <lollars. 




(V 1 


23. Capifa1hatiou.—T\w word "cai)itali7.ation" pre- 
sents a (litlieult e()neei)ti()n unless we hold in mind the 
root meaning- of the word "eapital": Capitalization 
represents the relation hetween ineonie and eajjital. 
whieh may ])e made elear hy an illustration. Sui)pose 
a manut'aeturer has a ])lant whieh yields him a net m- 
eome beside his own salary and a reasona' "r profit for 
undertakino- the business of say >^1(),()00. Sui)i)ose this 
SI (),()()() is the average for a number of years, whieli ean 
])e made a safe basis for future ealeulation. If this 
manufaeturer were asked to tix a i)riee on his establish- 
ment, how would he '^o about it f Perhaps the whole 
plant, maehinery, buildino-. cte., did not eost more than 
><1 ().()()() originally. Init tiiat its hi<>li earnini>- power is 
(hie to the ])ossession of a ])atent on eertain of the ma- 
chinery. ()i)viously he wotdd not l)e willin<i- to sell the 
business for Si ().()()(), or even $-2().()(M). What lie is 
really selling is tiie ri^ht to an ineome of $1().()()() i)er 
year! Tiie priee whieh he would demand for his busi- 
ness would not be mueh less tlian lie would have to pay 
to obtain the .^10.000 ineome from anotlu-r souree. If 
the oidy ineome he eould buy with the i)roeee<ls of the 
sale of his business were bonds yielding- .5 jnr cent per 
annum, he must needs reeeive at least S-_>()(),()()() in order 
not to be a loser in the transaetion. He eould not de- 
mand more than Ji<-2()().()()() beeause no purchaser would 
\)v willinu- to buy a -^lO.OOO ineome at a priee whieh 
would purchase a $11,000 or $l-.>,0()() ineome iu the se- 
curity market. 

If the owner of the plant thouo-ht of incorporating a 
company and issuing shares oi' stock, he would be con- 
i'ronted by the same i)roblem oi' placing a valuation on 
the business in order to projjcrly eapiiaiize the cm poia- 
tion. In this case if the income were practically tixed 

^ -f 


^inVF.v AM) i{\\K[\(; 

at $(MK)() juul there was a wide MKu-lut lor the shares, 
't IS ikely that at a eapitahzali.,,, of x-Joomo the shares 
wou hi sell at scM.ewhere near par. That is to sav, the 
^rtal sn.n of their market vah.e wouhl he about !J<20(V 

Oipitah/atlon, therefore, is ^he process of plaeino- a T f a eorp.M-a- 
t'<'" -s <nereapitah.e,l. the vah.ation whieh has heen 
Plaml upon ,ts assets or the s<,uree of its earning power 
Ijas l.een too hi^h : in sueh the shares sell be^.w par 
11..S n.ay happen not only beeause the net earn in <,s 

■•'•c- too snum as eompa,e,l wi-h the capitalization, but 
'-crause ol the uueertain future, or beeause the de- 

;"••'""/'>•■ ^»'^"' is very hmite<l. Corporations whieh 
jave been overcapitalize*! a( the be^innin^ n.av tin,l 
f'M theovercap.tahzation has disappeared in the course 
.. line because the earnings have increasecl in amount 
|"'.l staluhty. Inth. lan.uao.e of finance, "the wat^-r 
lias heen s(|ueezed out of the stock." 

This subject .,f eapital and capitalfzation belongs to 
t e b,oajler scence of finance, but so intnnute i.^ the 
idat.on between capital and eurrency that it is best to 
get a clear ulea of capital at the outset. Capital in its 
vanous forms like consumption mnst chancre 
f|.'nds u. order to realize the o..,,atest economies in .;,- 
< -H- .on and the n.ost efhcient use of all forn.s of pro- 
line .on ^oods. To be most efi^ectivelv utilized, the 
and. n,achnu ry. buildings, n.aterials, etc., nmst f^nd 
the.r way into eontrol of those er.trepreneurs who 

can most efliciently organize and n.u.^i them! T,!;: 
very ,,, ru-.f, ,,,,,,,, ^j^.^,^ ^^^ ^.^^^^^^^,^ .^^ mysterious 

aiHl <hi!innt character, so tlf't .....nv .f / "'"""^ 

u .1 • "•' "V" •' •" '''' oiiiser. i he movement of can- 
ital .s so mt.mately related to n,one> and bankinu. tJ^ 



one cannot l)e nndcrstool without mastering tlic other. 

'2i. Demand for capital ^foods. — C'a[)ital i^oods arc 
|)i()(hicc'(l hy iiulnstry for tlie market, just as are eon- 
siunption «;'oo(l.s. They are ])ro(luee(l either to till a 
(leinand already existiufj^. as when the nianul'aeturei-s 
work on contracts, or tiiey are made in anticipation of 
a market when they are ready for sale. The demand i'ov 
capital goods comes from enti-epreneurs who wish to use 
tht'u in industry foi- the production of more ooods. 
Ik-fore the entrepreneur can take ea])ital <>-oods off tiie 
nia''ket or <>ive orders for their manufacture, he must 
havit ])in"chasing power. This jjurchasing power he 
mav ac(iuire in a variety of ways. First, lie may pos- 
sess the purchasing' power or caj)ital as his own prop- 
erty; second, lie may he entrusted ^v!th the purchasing 
power or capital of other men on various terms, either 
for a tixeci compensation per annum or for a definite 
share in the |)rofits of the husiness. 

Tliis })urchasing power exists in the form of money 
or credit; in most cases it is hank credit in the form of a 
deposit, against which checks can he (h'awn to 
j)ayments. It has its origin in income which has not 
heen spent for consumption goods hut which has l)een 
saveiL Incomes are deri\ ed originally solely from pro- 
duction. Those who gain a personal income without 
producing or assisting in the productive pi-ocess appro- 
priate the incomes ol' others; hut originally every income 
'vas the product oi' someone's productive industry. 

25. Money incomes. — Under modern conditions very 
few of the producers take a share of the })roduct as 
their income. They prefer to convert the product into 
])urchasing ])ower, that is. money or credit, and dis- 
ti'ihute the proceeds as money income. This money in- 
come, however, is simi)ly re])resentative of the products, 



n 1 ,s o„,„,.,.t,l,k. „,„ .,„, ,, i, ,,„. ^..,i^, ,„, j|_^ _^^^_^._ 

K . iKivl,,,,.. ,!■ IIkm i,„.„„K..,,,,i,,,, |,,„|.„, ,„ 

v»c I „s |,u,vl,.-,s,„f; |,„u,.r ,-„ll,,,- lha„ ,ss,-ri 

'■''■'." ;' "■'■'"'" """'">>i of f.N,s„„ii,ti,„i j,,„„|s. t||,.v 

liiNujjv tile furul <iC • 

■'''"■"""!"■ I"'- tl'is ..l«tinc„,. (•,.„„, c-onMn„|,ti„„ i, 

-« _,n,K.„n„.ly, l,„t r... ,l,c p,„,,„.sc of%e..-li„'„ - 

--'■'«■ ".i...c,,,uc.. Tl,is conv>.,„„ ,„•,„„,,,,,„ ,. 

' .""" I'™'"'""" «■ ^ -tl.«- thai, .,:„s.„„,.ti„n 

«...l..s,.al,„v«t,„c.nt. I (• it „..,,. „„1,„,. , his savin..- 

f,;;:;'V' ^ " - p,-..!,,,,.,!. .sa,.,M,„,L., 

"■ """"," '--I'"-I ■-■l™.n...l.a,„l'a,va;vait- 

n,« :< M,arl„.| s„„„«Ik-,v i„ ti,, w„rl,l. T!,,- „n,sp,,.. 

,i.T:,nl''""'' "'' ''"'"""">"- .\ ".,y s,„all p,- 

"••'>"" ;'l'."l"ll,isi,„,,„„l„i,„,vas,.|„ss !<.„,, I„. 

.-;. yU,. «,,.,,.,. pa,,, ,,■ ansa., api,a, is ,;„.„ 

'»" I. ..Il,.a-.„l,vp,v„,,„.. |.„-i,„,,|,„,„| .n,,,,,,, ,,, 

;'.,;:,:;"■"'■ : r '•"'"'■ ■'■•■'I'i'^.'.^i-.siv,;,,, 

.''"^■■'V '■'"''''' '-i"ni„.,.„„vp,.,.„,,„. „,„, 

« s i„.,,.|..,.,,„.p,,„|„.,,„„„,,„„|^^ r„si.,l„. a- 

::.: -!"-:'^'"> l'"-li„ir„,.sl„„a,l„,-,|„.,„„, .|.,,^ 

•- i'.,i,„|,s i,„y i„„„K „| ,, ,.,,|,„.„,_ 




s\liic'li llms obtains the (•a])ital and expends it in rails 
and eciuipnunt. Secondly, the saver may de])()sit his 
savinj4's in a eoinniereial hank, in whieli ease the eapita! 
finds its way into the liands of eoniniereial borrowers of 
liie hai\k and is nsed as workin<>- capital to l)ny raw ma- 
terials, to pay wa^es and to carry cnstomers' aceonnts 
for short periods. Thirdly, the saver may himself hny 
stocks and bonds from a bond house or a trust company, 
and thus make these institutions his a<i'ent for invest- 
ment. Fourthly, the saver may hoard actual cash, 
which simply means that investment is postponed for 
the time bein^'. 

•J7. /^v// invcshnciiL An Ihe ordinary use of the 
ti'rm the purchase of slocks and i.onds in the market 
would be called investment, but it is not, however, true 
investment. In this case the saver has simply shifted 
to the seller of the bonds the responsibilty for the real 
investment of the capital, i. e.. the responsibility for 
convertinu' it into pr-o(hicti<>n uoods. It is only wlun 
till' capital is in the hands ol tlii' cntirprcncin- that an 
in\istmenl can take ])laee. Kntnpreneurs are con- 
stantly bidding- i"or the use and conlrd <»f tliis new 
capital which is as »'onstantly aci'umu!atint>-. 'I'hc en- 
triprtiKur who can offer the best raU' of interest or 
the lii-lusl di\i(Unds with the lust secinity has the ad- 
\anta,<4(.' in this competitive biddinii'. 

I'ndei- our modern coi;ditions of industry the lai\ui' 
corporations ari' liktly to lu- able to use this capital to 
the best advantauc and hence are in a jiositinn to make 
tlic must attractive ofl'ers to savers. 'I lieit fore, we 
find an e\er inereasiiiL; jii iceiitaue <*!' the sax in^s ol the 
communit\ flow Inn' in that direeli'in. 'I'his is to the 
ixiblie .idvantaiic, in so far as the corporation is able to 






woods to which the capital ^i\r. 



tliem claim, and the final irsult is an increased amount 
ol' product. J'or this reason, any syst'in whicii facili- 
tates the tlo,v of capital from the savers into the hands 
of the most elHeient entrejjreneurs is a distinct economic 
gain. All thr highly specialized financial institnlions 
perform this economic service, and their productivity, 
indirect tluninh it he. is to he r>easured hy the increased 
elficiency oT th.- eaj)iial which they have diverted into 
the most produc'ci\c field. The stock exchanges, the 
financial aiid commercial hanks, trust companies, under- 
writiiin; syndicates and all the machinery of jii^h finance 
are ccoik niically hcneficial to the country in the degree 
that they perform this function. 

Furthermore, this high development and delicate ad- 
justment of tinancial institutions is only possible when 
the currency of the country is of the soundest and most 
sell lit itic ch;iracter. Kvcry defect in the currency sys- 
tem makes it more .iiUicult or hazardous for such' insti- 
tutions to do !)tisiness and is a handica|), the etrect of 
which can he measured hy Ihe diminished eHiciency of 
all the industries of the country. The man who says 
that cnrreiiey and hanking (juestions arc no concern of 
his would prohahly he surpriNcd to learn that iiis wages 
are miimIK r«.r tlu prices ol' the no.xis h<' buys .•,ie higher 
(»n accomit of some weakness i- defect in Ihe system 
uhici. tin currency ref.u-m<rs are strixing to menii, yel; 
such is the c;'se. Causes which ;M-e tli( most potent" in 
pr..diiein- effects are fre((uenlly the most obscure and 





28. Value a rcfii.stcr of economic forces.— ^'mve in 
our mocitM-n civili/atiou every man satisfies his v.ants 
tlir()u<ih exehaii<^e of what lie pro(hices or helps to pro- 
duce, for wliit he consumes, every man is perforce a 
(kakr in values. Specific commodities are reduced to 
terms of ahstract value, and are dealt in as such. The 
workman sells his lahor, say. at ^\0() a month, and re- 
ceives an income of .$100 worth of <roods and services 
ol" liis own choosinji' from th' market. His economic 
welfare is entirely a matter of the relation hetween the 
effort rcijuired to earn the wane, and the amount of 
utilities whi'h can he ohtained with that wa^^c. Either 
a fall in the rate of wa<ies or an increase in the prices 
ol' goods has the same effect in aUerin<r the relation to 
the disadvantage of the wage earner. Kconomic 
changes therefore always appear as changes in values. 
\'alue is simplv a register or index of economic I'orces. 
Tile reward of the entrepreneur for liis productive 
( IVorls comes in the shape of profits. I'rolit is simply 
the diirereiiee hetween the cost of the proihict and the 
selling price. Any change of values which alters the 
cost or the selling prices has its eU'ect on profits, either 
diminishing or increasing them. We may call profits 
the mains])ring of industry, hecause they are the mo- 
ti\e which induces Hie entrepn iieur to organi/c industry 
h\ horrow ing capi'al. em|)loyiug lahor aiul renting land. 

\ N lien I ill" LX p'l'lil t II M I III |(i < >in -, i-> ^iiiti 1 1. 1 1 IV V 1 11 1 < |.. » 




neur little indnccncnt to encourao,- any new enter 

;;; ,;;;;:i:;rsss,;;;;2;»-::i 

• .s likely t„ he „ ,,,„„„ „, .^.,,, ,,,;, ^^.,. ;., 

> "son,-... ,,t,,,„.,l t., tiK. ,,,,,,,«t, ,,,:.: 1.,,,. in , 
''• '■'■■'.'"I ^" ' - l"Kl.-l " a,..s. .Altcnu,!. |K.n„,l. „7' 

^.•iiii conditions of \alne. 

The tact enr.vney and l.ankhur have -i most 

?™''''''-'"-"™t. Ik. ,•,,,,,,.. ',,„,.» .r,, . 

'"' '""'■'■ "';:-^- I"' !-"■ I'""-I1- /•,„■ <.ha„„.c, i„ J., e . i 
ImMrii-ssn.Mililii.iis. W<" 

'>!'- ''V ■■''"•■ ""1'- l«."l<. IV.r ™„„p|,, ,„, |,e 
'.'","""■'' "'''■^' '■> • l''-™"i(l,s.„„H|,i,V,,,' ,' 

'*;/''"'■■ 7 '"'■' .".•,,l„r,vl„,,l. "l'l„.v .. 

'■' ' • "■•"'- »"^l't 1- .x,..-,,.,.,! |,v ,,vi„.. It; 

""'•" "•>' '^ "'■ «i...<. This- >,,-,„„„,: 

::":^":7", >■ v-l.ik ,,, ,,;''. 

11 IS ncccssaiv. to liavc n ,.()nnn<.,. ,.,... < " • 

j^ • ■■•'>'".>.<., nu-as,nvnrd<„on,Mia- 

-- -wn.i.nis ai U-ashin.tnn are k,.p, ..,,,ain vard- 



sticks, wei^iits and vessels wliieli are the standard units 
of length, wt ight and capaeity. 

W. Definition of the dolUir, — Jnst as Congress has 
declared that a certain length shall he a yard, so it has 
also declared that the unit of ^■ahle shall he a tlollar, of 
'I'^.'l'l grains of pure gold. The only definition for a 
dollar is that it is '>'.\:1'1 grains ol' gold. All other so- 
called dollars are such hecause they are convertihle into 
standard gold dollars. In this convertihility lies their 
value. 'I'hey are not standard dollars, hut representa- 
tive dollars. l*rice is sinii)ly value ex])ressed in terms 
of dollars. If T say this hook is Morth <$.5, I mean that it 
is exchangeahle for live times 2.3.22 grains of gold, or 
its e(iuivalent. 

If we speak of a ])i rson as heing worth $.")(). 000, 
therd'ore, we mean that he has a legal title to 
|)roi)ei'ty consisting of various forms ol' wealth luuing 
a total exchange value of fifty thousand times the ex- 
change value of our unit of gold, oi- its e(]uivalent. In 
order to I'cali/e this exchangeahility. howcvei-. it is first 
necessary to con\ei't th.e wealth into money, which is 
oi-dinaril\- very dillieult to do at the market price, and 
then (Mitnerl the money into goods desired, which is \v\ 
easy to do. 

.'U. I'jiVchan^cahUitii the sole iitiliti/ of nioiiei/. The 
d( sirahility of money as a form of properly is due solely 
to its ready exchangeahility: for any ollu c pin'pose it 
is inferior, producing no income, as do factories, 
stocks, honds, etc., and rc<|uiring extra |)i"eca(itions 
against theft. Its iiianal>ilit\- is simpK another form of 
its e\( Iiangcahility. The honowcr purchases the in- 
eoinc-yielding wealth and promises to divide the income 

">> i 1 11 1 in ii i n n I 

'V2. (told flat (III ideal staiidurd. Gold is verv far 



from bc.n^r an ideal stan.lanl of value. Suppose the 
yankst.ek had the habit of shrirlkin'^ an,! 
expa.Hhn .- hein.- thirty inches one year and fortv h.ehes 
the next ll,e merchant contracting to take one thou- 
sand yards of cloth a year hence wouhl run the risk of 
losing, on tlie deal merely on the Huctuations of the The <loIlar is just such a n.easure. I'l 
value IS chano-n,. constantly. This fact is conceals 
rom the ..nhnary ohserver. who attributes all fluct-i- 
tHHjs m prices to commodities rather than to the dollar 

Price states the ratio between the xalue of '>;j .>o 
gran.s of ^chi the value of the thin«- to be measural" 
Ihc -atu, C.U1 be altered by the chanoes in the value of 
«ohl as well as by changes ,n the value <.f o-oods ]f 
wheat falls t(, .-,0 eents per bushel it mav be because of 
an alteration in the relation of demand to supplv in ref- 
erence to wheat, or it may be because of a dian^e in 
the value o money. If the price of wheat alone has^r,d. while the prices of all other commodities re- 
"'ain stable, the conclusion must be that the changes 
were due to causes affectin^r wheat alone. Ifowerer 
It all prices have shown a tendency to move in the same 
« n-ecfon, especially when it is reasonablv certain that 
there have been no changes affeetin^r the relation of sup- 
ply and demand of these ^.oods. the explanation of the 
'••'" '" j)nces must be sou^d.t i„ „,onev itself 

tnbute,! the general fall of pnees to an increase in the 
value o« o-„ld, the sole .slandar<l of value. Their 
'•^■"K-dy. b.metallism. or a double standard of both .-oM 

^»"d s.ver. woul.l have raised prices, but it wouhl have 

caused such a rb^tni-Ii..,./.-. ..<• .,..:. . 

-.!i^^ ... [/..v^i ,11111 rji(iii. t»oiJi 

ose the 
11?^ and 
- thou- 
risk of 
of the 
-'. Its 




temporarily and ])ernianently, that many tliink the cure 
would have heen ten times worse than the disease. A 
diseussion of this principle, however, belongs to a later 
eha])ter on the Standard of Deferred Payments. 

The idea that the value of the dollar is a constantly 
fluctuating thing is so novel to most peo])le that it is 
worth while making it very clear. In order to do so it 
is |)erhaps advisable first to consider the general prin- 
cii)les which govern the value of anything, whether it 
be commodities or money. 

'.y.i. DctcrwiiKition of value. -How are \alues de- 
termined and what forces govern the fluctuations 
thereof:' The statement of the older economists is: 
Value is deternuned I)y Cost of Production. A thing is 
worth the cost to ])ro(luee it. The insufficiency of this 
explanation is ap])arent when we consider the great 
number of things whose value is widely different from 
or has no coimection with the cost of production; land, 
for example, which has no cost of jjroduction, or build- 
in<)s of unsuccessful enter])rises which may sell for one- 
tenth of their cost. 

.'U. Viil'itfi tJiior// of V(tluc. — A modern theory holds 
that value is determined by "utility." rsefuluess or 
desirability rather than cost is the (]uality which gives 
a thing power to exchangi' for other things, rseful- 
uess. however, is a matter of personal estimate and varies 
infinitelv with different individuals. Since "value" is 
expressid l)y the market i)rice. and there cm l)e but 
one market ])rice for the same thing in ofie community 
under the same cireumst an.'-'i"", the utility uicorists were 
forced to lind a utility which was usefulness to the 
whole eouiinimity or a sort of social utility. This they 
named "marguiai ulihlv, and gave the world an ex- 



pression uhidi has Ikvi. r„,ni,l cxtrenidv useful. The 
tern, is r..i,iin- int.. e nnniou u«e and is therefore worth 

:J.5. Maroi>,a/ utilitn.-^h, a small eitx- then' niioht he 
one i,ers<.,i uh„ u-oul,I be willino- and ahle to -ive anv 
amount up to for an automobile: the.x^ n.ioht 
1.0 another whose linu-t is .^!)..-,0(): and another at .^1) 000 
and soon. As ue o,, ,l,.wn. the number of j,ossible 
p.irehasers mereases so that there nnohl be several lum- 
<lre<l at a j.nee between .^r,00 and .^Kooo. 'phis jH.ten 
t'al demand for automobiles niioht be represented by 
the lollowmo' diam-ani: *^ 

<:iO,000— r — ■ 


S.OOO — 
6,000 — 
4,000 — 


« 1 

C i 


3,000 — 

2.000 — 

1,000 — 







the ( 




o.hnnns represents the monev 
<|.nvalent ot the denuunl for automobiles, an.l th'e 
I'rea< th of the eol.nnns represents the number of auto- 
n.obdes wouM be bouoht at the (lifferent priees 
Suppc^e un.k.- these eonditions three ears were bmu^ht 
;> that e.ty lor sale. The A would pav .^10 000 
'•:;'''^f'-'-''<'-'-tlK.l..ows there ar^lnj He 

sol.l. so he ret uses to pay as mueh as he would if there 
-re only one for sale. To dispose of the three auto- 

'• oJ-. tlH. de.der nurst not .lenwmd n.ore than -l^lMmo ■ 

;'•••'' i-- ;• H. and (- will supply tlK^^^^^^^^^^^ 

tin s estabhsh the ,narket priee in that eitv. The auto- 

JH.'f.. OS may not have eost n.ore than .^1.000 t,, produee 

!;r'"''':^\-'-''''--'--.l.tiuHxin.te,, ' 
1 lie xuM'i' IV ,l,.f. ........... II.. '^ I'liL*.. 

is bv^l ' .;;--=;; = =;=^- 'v ''-^ '"ar^mai utihtv." that 

is.l.> ll-eutd,t;,.| the.automobih.pM,,|iasedbv"c'.wh. 



\ALri: iw 

is callcil the iiiai-<^inal piii'cliasrr. Mar,uit) means "cd^c"' 
and C" is the piu'ehaser who is on the <'(lu,-e of the market, 
ir there had l)i'en oidy t\\() antomohiles. he wonhl not 
ha\e heen sn])i)hed: il' there had heen t'onr instead of 
three for sale, the priee wonhl liave had to he reduced 
lo .ss. .)()() and tlien 1) wonhl have heen the purchaser on 
the margin. 'I'his example is of course hii^hly the- 
oretical and would prohahly ne\er liai)])eii in this way 
in I'cal life, yet the pi'inci|)le is true and \\orks out \\ itli 
^■I•eater precision, as there are a yrcatei- nnmhci- of 
huyci-s and sellei's. and as the know Icdyc of each othei's" 
rial desires increases. 

.'J(!. Miiri^iiud iitilil// to I lie iiuliiidiial. — In the illus- 
tration we ha\e assumed that each l)nyer desires hut one 
unit of the article foi- sale. With many classes 
of u'oods, each huyer may desire niorc tlian one unit, 
{•ii>ars for instance. Some wealthy men miiiht <4i\c a 
dollar if they had to for one ci^ar a day l)ut they would 
not yive so much for a second. l-"rom this t'act we 
de!M\e the ""law of satiety," tiiat v\L'vy unit of a com- 
modity consumed yields successively less satisfaction 
and has less utility to the consumer than its predeces- 
soi'. 'I'he demand of any one consun\ei' for units of 
a ^ixon commodity w ithin a i>iven period may i/c I'cpre- 
sented hv the follow inj'- diauram: 

I ;^ 




.(XI 1 1— 1 


-'. ;}, 4, 5, 6th 


To make a chart showinn" the demand t'or cii^ars, it 

^V()!!!d he ! !', ('('SS.! rV !•> CO.'Mh!!!'.' ! h.' • ■■h:!!'!'- !''-'n!"'.'Se!!t !!! "' 

the demand of each coiisumei". Snpj)ose for the sake 
of sinij)le illustration tilers were one huiuhed consumers 


.M()M;v AM) i;\\Ki\(; 

"'' ^''-'""^ '" '■'"• '"•"•l^<t- ^''^'li ^vit!. a pntnitial .Icn.and 
npivscnlc.I l.y llir tnn.ncino- diaura.n, a chart slu.u ,„.r 
the «4'ciitral (kniaiid would \k- Ihiis: 

$1.00 ' 
.75 — i 
.50 — 
.25 — 
.00 — 


Ist. -Jnd. :!>(l. Ill,, .Hti, -111 .MIC liun.liv.l. 

Supimsc ilu. , Makers ,.r particular (|ual,lv ..r 
'•""'<l 'I'-'l^c' a fair profit l,v scllino then, at "j:, 
"■n!s. They ^^uuUl pnnhicc live hmi(hcd hccaiisc thcv 
<-oul.l find purchasers for that .luah'tv at -J.', cents cacll 
llKy could ,H,t Mvt nioiv hcrause there can he l.nt „ue 
Pnce in the market, and the huvers ass.nnini.' that thev 
nnderstand the situation, will pay no more than neces- 
sary. It the niannra.-turers make more then five hun- 
'''■;'<1 c-.i^ars and attempt lo sell sav fiv.. hundred an.l 
''<ty. tiny u.Mild foive the pricr I.el.m iV, rents and de- 
stroy their profit. 

.'{7. ILnnidlinliini of Ihc ha, t/unrhs. It is easy to 
'".derstand nou nhv the value of anvlhinu- that "can 

"■easily pn.juced coincides with the cost of production. 
If the value is much ahove the cost there will he an ah- 
;"'''"'•■'' I"'"''* '■" ''f- l"'Hlucers will hv attracted f. the 

"isiness. the supply will 1,,. increascl, an,l the price 
iM-ono-ht <lown hy the coinp(titi<m of [W~ sellers until 
't ;-""u-i<les with thece,st. Converselv. if the valu,' is 
''"''7 ^•"^*- "'^' ^"'PPIV will he rc.luccl on account of 
i;'-"<l"«vrs kavino- the husiii, s and the price will rise to 
'I'ecost. I r file supply of the lhnn,,sfi.x.d. the market 
I"'";<' .'"'.1 cost of produc-tion mav June no relation to 
each otiiei" 




ClIAl'TKli IV 


:W. Pnwlihc ideas of value— 1\\ the pm-ediii^r 
chapter \vc liave (lesfril)r(l liow llie iircessity lor llic cx- 
clmiiyv ()!' <i«)<)ils was tii'sl felt. \Am<x Ix-'I'ore the ri^-hts 
of iJiivate property were ree()<^iiize(l within the tribe, 
theri was exelianoino' of articles, usually luxuries, or 
ornanieuts oi' u,()0(ls of an oriuuneiital character between 
the tribes: first in the nature of gifts, later oTowin<r into 
Hie regular systematic exchan<ie. This trade was direct 
h.ii-ier. no niediuni of exehanii'e being used. 

Later when ])ri\ate property rights became more 
(Ictinitely recogni/ed within the tribe, intra-tribal ex- 
change sprang up. The first articles of this tratbc were 
the injported goods, to which a more definite value was 
;iserit)eil. inlliienced by the limitations in the supply. 
It was most natm-al that these articles with their dcti- 
iiile value should become the measm-e of the exchange 
value for the goods domestically exchanged, and thus wc 
have the bi-glnnings of the idea of a standard of value, 
still very crude and ill-dctined but serving the pur- 

l'"iu-therniore these Im|)ortcd goods were as a I'ide 
highlv desired by everyone, and were, theiefore. much 
- asirr \() d;sl)()-^e of in exchange for other things than 
(loimslic commodities. This gave to them an additional 
utilitv ([uitc aside from their usefulness or then- ability 
to satisfy the wants of their jjossessors. We call this 
utilitv. 'exchange utility." 


MONKV ANf) 15.\NKI\(; 

^ '{i». OrnaiiKnhil .sin, Its carl// Nsrd a.s /none//. Article's 
'ii'st iisid ;,s .n.UKv in .Mny (|..fii,i(( way of vvliicli u c 
Ikivc kiiowlednc \\tr<. oi'iiniiicntal stniics. An ex- 
Iravaoant love L.t (.ni;ini( nt is one of tlir nnivcrsal 
diaractrristics of savnovs. Tiuy arc lik, |v to cstin.ate 
•"■'laufnls at a nmcli Iiiulier value tlian tlic more neces- 
sary coniinoditlcs. Tlic ntility nf these ornanienia! 
stones or slujls was so constant and nnivcrsai that tiie 
'''■■'"'•"(i ''"i- them uas likely to he hiohiv stahk. Th.c 
savane was nnick to realize that if he" conid possess 
linnsclr n\- a supply of these articks he had at his co.n- 
llKUid the power to ^rct anythino- else of which h.- nii-dit 
'"■ "i need. JIcn<-c these stones took on an additional 
'""^■ti"" ri' a store of value, easily exchano'eahle for 
other \;dues. 

U). Three fiiiiclions of prirn'ilhc ,n one if. —Thus in 
the earliest for;,i oi" n.on. y we have the three functions 
well (Icvclope.k the function of Kxchano-eahilitv. of a 
.Measnrr of Y-Uv,, a: 1 .,r a Sfuv „(' Value. In" all the 
more primitive nations this function of store of value 
was moie imp..rtant than in modern tiuics. Jewish 
M-omen of ih. Oid 'IVstament carrie<l al»oui their per- 
son tiieir dowries m the foni) of ornaments and jewels. 
'Die East In.lians of to-day eoi.vert their surplus'wealtii 
'iito sdver and carry it ahout with them, not so much 
f '-om an cxtrava-ant hn e of ornament as from the more 
practical motive of havino- always at han.l the means of 
"i.tamin- the necessary articles of livelihood. As we 
shall see latri this -ustom is a vcr.N- forniidahle obstacle 
"• th" p.atl. of (conojnic development. 

H. U'a.»'pnm. TIa Am-rican I-idiaiis uere in this 
stanv of ciiltunii devek)pment when the American set- 
tlers tiisl .•a,ue hi contact with them. 'I'hcv had elimi- 
nated all fornix of ornamenlal money except uampnm, 

;vni,r'ri()N or Tin: mkdux! ok I'xcii wci: :?T 






vliidi n.iiMsUM ni' of !H■a(l^ rut fn.m slirlls. 
Tlicsr lu'iiilN wire ol' t^\() colors, wliih and l)lack, tlu" 
l.lark Leiii-- worth douhlc thr white. In trade with the 
lii,li;.iis tlie sittli-rs I'outid it i-.)ii\ eiiiiiit to use waiiipuiii. 
;iii(l it therefore aecjuired a \ery dcliiiite vahie in the 
,.n!onies. The colonies hickin.u' a supply of ^iohl an;l 
silver coins were c()mi)elled to make payments amon.i-- 
tluuiselves in wampum, and it was at one time receiv- 
ahlr iis leual tender for payment of dehts to the amount 
,,f ten pounds sterlin.u'. or ahout ^rA). The disad- 
\anta<^es of this form of money were manifest when 
Miuie clever hut more nnscrupidous Kuroptans invented 
a method (.f dyeinn' the white l)cads hlack and douhlino- 
their value hy the operation. So difficult ^vas it to de- 
t(et this primitive counterfeitinu" that wampum sooi\ 
•ame into discredit. :md at len<;th was discarded. 

V2. lic'ivcr .^l/nis.' Tlu- next form of mechum of ex- 
ehann'e to he adopted foi- tra(hni>- with the Indians had 
tjie nie'-it of hein^ imix-ssihle to counterfeit. 'I'he steady 
demand foi' lieaver skins for manufai urinu' into iiats 
in l-jiuland ua\ e them a n ery stahle value amono' the col- 
onists, and they earl\' aeiiuii'cd the .(uality (d" exchan^^e- 
ahility in addition to their ordinary utih'y. When a 
ti'ihe' passed from the hunting' to the pastoral sta,u'e 
of cultural development, it was natural they sliould 
adopt a coiumodity for money v hich existed in ureater 
and more constani sup])!y the products iA' the chase. 
Thus we lind amo'i^' the ancii'nt Ilehnws and Ai'al»s 
that cattle were used tor the jiurpo-f. However, it is 
d(.uniful whethe'- tl.ey attained any ,ureat circulation as 
a mediiun of exchanm': it is iiiorc lik- ly that they i)cr- 

irii.ed the function (>[' a measure of value. In tlie 


hook of Cenesis we constantly read staie-uctit'^ of tiie 
v.-ealtli of indi\iduals as measured in the si/e of tlieir 


-^"'m:v AM) irwK.x,; 

. , '■ '""* •■""' lis |'<nslial)ilitv 

,• -'^ '"^ i;iic(r(;!!iifv (.}• tlic siiDi.N- r 

' '"' lie More t n- f .1 .* •• 11 
41 . '■'"'Ud w .Is also a<!'iMis! f 1/..., <k 

iiiakc list ,,/• 
'/'""■'' ""'■«' pnuiitiN,. 

.'I I hi 

.'I I III 


'■'■'■•' '" "liix.rt sue!, ,,i, r- 

ni( tallic 
■ ini|)(ii!s 


« ^- '«■^'>':'^;;:::;:•:;;•^::;:r■^^ 

i:\()i.r'i'i()N OF I'Hi: mkdum uf fxciia.n(.k 'm 

l((l)acc-() {•iii'iciK y ill \"ir<4iiiia reveals a <^reat many of" 
i the priMeii)le.s iiiidei-lyiiio- the seienee oi' money. The 
J story is very well told l)y Mr. Iloraee White ii, his i)ook. 
'i "Moiuy and lianking": 

In Hity at) act was passed forhiildiii^- tlic iiiakiii;;- of loiitracts 
|)ay'il)le in inomy. tlnis vlrtnallv niaklnii,' ti)i)acc() the soir cur 

'i he Act of KJl'i wa^ repealed in 1().")(). Init nearlv all the trad 
In;;' in tile j)i'()\ince conlii. i.d Id hi- done with tnhacco a-- the 
nil ilinin of exchange. 

In \()':iS the price of tohacco in silver had hei ii H-. (id per 
pDUnil in \'ir;;'inia. Tlie cidtixation !n< i-( a-((i sn rapidiv that 
in 1():>1 the price had t'alli ii Id (id. In lirdrr t.. rai-e the price. 
>ti p^ Were taken to r'^lrict tiie ainonni i;rn\\n and In inij)i'<)\(' 
the (luality. The rl;;'ht to cidlivate tohacco \\a> riNti'icted to 
] M)() jilaid- pi r poll. Carpentir- and oHnr niech.inic- uere not 
J aiio\\ed to plant toh.icco "or do ;in\' (itiier «oik in the ^ronnd." 
; 'I'hesi' iiiea-llle-- Ucre i neti'i <'t i \ ( . 'I'hc jiric; continued to t'.tll. 
In l(i;5!) it was oid\ ;>d. It uas nou en.icled tiiat halt' of the 
H'ood ;uid all of th( had should !)•■ de>trc\ed. .and there- 
(tt.r II creditor^ -hould accept M' Hi. f(U- 100; the crop 
of KiKi -hoidd not he ^oiii for ir-.> I'^d.. nor that in Kill 

lor le>s til 

an !,J>. per pound, under jun.dty of fortViiine of tl 

uholeci'op. 'I'hi> la\v w.i> inetitctiial, a-- the pri \ iou^ om ^ had 
heeii, hut it cau^((l much injustice Iti'tueen i!''hlor^ .and ci'((iil(U'> 
hy ImpauMii^' the ohhi^ation of i\i~tuiij;- coiit i-.act^. In Hi!.") to- 
hacco was worth oiil\ 1 ' .d ,ind in l<i").") (jnl\ Id. per pound. 

Tlie^e 1 vents tea( h U-- t a coninnidit \ w hicli is liahle to 
and iiddiii;j,i> ot ~uppi\ !■> not ,a <livn-ahle <uh Io he u--cd 
a-. ii!one\ . 

in l!ie year !()()(! ;i I I' » u ■ ,eo;,tiated and ralili^d hitueeli 
the coloiues of Mai \ Land. \ u'' ua. .and i '.irohn.i, to ^Inp iilart- 
ni^' toii.icco for oin ui oi-d. r to rai>e the prici . 'i'hi> tein- 
pDi'jiry susjH'Hsion of pi.anlui;^ in.idi necossarv some other mode 

,..._, ,,,^ 

• t(V«'lttl)t'^lt « 

n;uti (I 

( I lit I I M f I I I j f I t I f t li 


M'lM.v AM) 15.\.\Ki.\(, 

''"'^ ■""' i"'i^'i'' 'M- c.ii;,,., ,i,„. ••;„ .1, , . 

^T;^r' '-- ^-:M..:^:';;::::■ ;::,::- 

'II U)S:i ,ui ( \tr:i(>r,|,narv .,,;,*• 

'II'' inu pn.-,. ,,f inlruv,, M , "" 

,.^, ,. ' . ' ""■'""• -^'■"i> I"'.,, I,. .,„,„,! ,,,,,„„„ ,.„. 

;;:;:;:;:.'" rirr'"''' '■■""- -■ '-'■ ■■■-- 

scKr. to--, III, ,• ,,||,i „, 

pl.iiiK uli, r, v,.j- c, I 

"M"-l u... ,i.,t,..,. tli.v I, 

ImikIwI tlifiii 
;' *'"""^l''l'"-»n.;rv.l,.>,;;.t.,|,,..,vo 

^: A,.,. H.M.H:r, ::,!,: :;'T';'^'';'\'''''''''''' 

::;; ■:';■;■'"•;' :■■""> "I'" I -^.in,„, „:,:::; 

-'I--'"- Ml,,.. I, , 

■■;■'"'■';":•' ■■•■■■-.I ■ -...i 1,1 „, 

;;■;"«,' ■•''' ■■ >■ in.t,.i.-,,^„ 

>'irt I r (leal ),_ " 

•T- .111(1 

H' ii.a- 

t:..:i!:r'- ""■ >•'- '>- ■- 

'"■''■'"'^ li"l'-. .mil Ii.,. Tl„. t„lMr,., 

Hie IVai III 

i( re 

i"- i'( liic (IIn- 
' ".^ """""- l'.nHl..uu|., nu- ,1, ,„„,^, 

"■'■" ill III'' U.Uv||,,|,.r, ua, 

,, ", " '''— li'iiiU''. Til,. ,„|,a,v„ nn,,. .,,,. ,„,,.; 

III'"!' .1 i'< l.iii_\. In 

||' i!"t' -."" ".!> Illlro- 

'■> I .iiMilli, 1- \arii t \ ,,|' , 

I' II l"-\ . (all, ,1 ••,■,, 

" -' "' IV l>MI,(l 

cask li, inn In 111(1, , I ami 

'"■ I'"-'" Hi."' 'n-k^ ni- f„|.a.,„. .a. 
'" '"■"•'^^ ^p.(i(„.| n„ 111,, ,„,!,,_ 

Ml! Us, iiiilst I 

"■ '"•"'' "I f'''"ll III st;,(|n..- f|„ 

::;„;:;",'■'• \ '■'-■:■■'• '-■>. ■„:■; 

'^^'"''•'' "M"'!-. liKi,!. r,„- MH-n. V 


•»'J«tiiii ill X. \' 


r.\()i.r'ri()N or 'iiii: mi.dicm oi' i:x( iia\(.i: ii 

V (Hit ()(■ 
iiN for a 
( Ti asiii^- 
'l tlifiii 
nil- III, if 
■|( (luM- fliiii- 
ImI Ilia! 
II a I Mil 1 1 
<'!■- and 

tile iia- 
i--ii( il 

nt aiiij 
« Ik re 

lir (li>- 

I- \\,-(s 
iililc I•^ 
■ ^^c|■( 
n aii\ 
. Ill 
ml ID 
. (acli 

■ <lic 


< \- 



iliaiiy'L' is i^c'iK'i'al accc i)tal)ilit\ . It is this i,iialiiy wiiicli 
(listini^niishc's tlic iiioiicy commodity I'l-oin all otlicis. 
As a rule a coiiiinodity ln-t-omcs iiioi-t* ac'cr|)ta!»lc' in 
( \('}iaii<^e, tlic Ifss its otlu-i' utilities arc cousidt-nd. ainl 
Ilk' \\i(K'!- its use as a nu-diuiu of cxcliati^f. This tiiial- 
ity (if acc't-ptahility dcpruds ritlicr u|)()[i a ufil-tstah- 
lishfd tradition or upon an ultimate inarixet uhei'e it is 
estei'iued for its \\.int-satisfyin<^' |)o\ver. Oi'nauieiits 
possessed this (juality to a lii^h de-^i-ee heeause this hu- 
man desire nas almost unixci'sal amoni;' primiti\e peo- 
jiles. In the eas( of luavci- skins and \\ami)uni. the 
insatialde demand maintained their aeeeptahilitv of e\- 

Uk Divisihilil//. ][ is liiuhly desiral)le tliat the 
money eommodity should i)e eaj)al)le of division into 
small units in oi'der to ser\c as a medium in small trans- 
actions. This (juality of di\ isihility was absent in 
liea\(i- skins and cattle. C'ommoditiis which contain 
small vahu' in hu\uc !)ulk. which with the amouu* of them 
JK'fVssai'y to make e\tn a \(i-y ordinai'y transaction i'e|)- 
lesents so ^rtat a Milume as to he difficult of tiansporta- 
tion, are unsuited for th.e pui'posc of monc\-. When the 
value of tohacco fell, the dilliculty of transportiny' it 
added to its othei' disadx aiitaut's as money. 'I'lie C'lii- 
nese i)roir/,e coins of the present day. called ■'eisii." oc- 
casion ^I'cat inconvenience to ti'avclcrs who must caiiv 
a mo<lcratc sum with tin in. Their hulk is so jjreat that 
s( parat( conveyances must Ik ustd. and it is oulv a (|uis- 
lion of time when they will he eliminated on accounl 

ol t heir cuillhelsomi liess. 

17. I iiij nniiit It. I niformilv is another hii^hiv nec- 
essary (nialify in money. Win n the estimates of value 
were only appioNimalc it was no! so necessarv that the 
units of' the cnrreticv shoidd 'k umtorm. hi-t when the 


-M()M;\ AM) HANKIXd 

cxdia.i<^i,,^ InraMR- ,nn,v ^rnrral. th. hu-k of u,,ir,,m,- 
'ty n, the units hcranic a serious ohstade to their ..,„- 
eral acceptahility. The laek of this verv neeessarv <mal- 

<y nuulethenMalues very in.letenninate and unm-tain. 
Heaver skms uere unsuited for th.. purpose hu^^elv on 
this account. 1 ohaeeo was liss so. 

.ty ot un.lornnty is that <.f c< that is the 

possession of certain ..uaHties uhieh are distinctive' and 
^■ reco^,n.ed. either on a.rount of color, texture or 

H'.^ht. ^^;^npu,n^vhich possesses so M.anv of tlu- other 

<l"a< desu-ahle in money failed in this important pa- 

-Uhu- .t e,add IH. easNyc terfeited. ' ''of 

t"squahtyotc-o..n,xahih'tycanheovc.reon.e., the use 

" some mark uhich is either diflicult to counterteit or 
;:'"•'' ;•'"' '-^^ i';'"»--t-i ''.V severe penalties. The oM 

a.s ulnch made counterfeitin.- a capital crime, pun- 
^sI.ah ehy death, when then, .ssitv for 

•'''''''tM.nn.u- the quality of c-oo,,i.ahilitv in the curi-enev 
-.pprcnaed. Most of the early cun-encies ..„. „;• 

"t-1 lor that use hecause of their hahihtv to detenora- 

"•"• '^-'''''''''i'ty which has this defect is unsuitc.l as 

• s '.vol .alue. an<l the UHMMcnt the deterioration hc- 

.u to akeph.. ,Mosesthe,uaIi.yofacceptal>ilitv. 

4.>. sMn „i ,,/,,. „„^^ „,. ,,_^.^^ ^1^^, ^_^^ . _ 

''''•'Y'-- elin.inatcd hy tlH. use of H.etallic coins. 
'"' '••"•■'• '•>. '"■ "- •"• --«lit. is one <,ualitv 

'■-•--Oneh n.,dlic currencies fail to possei. tha 
-;t.-''"l v'.ivahic. 'Ihewhoh cs.ion of M.e stand- 

"':'^'"""' ""■ "'"''■ -'.Iroversy ov< r sih,,- and ..oM 

ansos ..ut ol this charactenstic lack of stahditv of . due 
;''''7''''<' -''-'' 7 siull disc,. sat len.,h-p..,,,K.; 
""■'"'•■'In-.lto! tins process of, . vol,. tioni, 


I ,. , Hi iiioncv. the 

'' ^-"'^"■'•''' "i i'.e unlit an.i the extension of the 

i,\()i.i'i'i()\ ()!' 'iin: Mi'.DiiM ()!' I'.xcn.wci: ni 

■ir <ivn- 
■>■ <|iial- 
^vly oil 

(-* (|iial- 
is, the 
\t* and 
turr ()!• 
V oilier 
it par- 
ic'k of 
lie list' 
IVit or 
\c old 

y for 
■(■ ini- 
trd as 
II l)(- 
ts in 

. tl"..' 
• the 

ii.; i)[' foiiiiiiodilies ,)'ssiii!4' more of IIksc (Usirahle 
ijiialities, was llir iiiii\crsal use of the metals as moiuy. 
i!( uinniii^" witli the eommoiier \arieties of nutals like 
lii<iii/.e and iron in Ijie form of the utensils whieji serve 
I useful |)iir|)ose otinr than exehaiiii'e. we may t I'aee 
iliiwu the (le\elo|)ment to the coin whieh has no other 
|iur|)os(.- than to he used as a medium of exehani^e. 
Adam Smith s])eaks of a \ illa<4'' in Scotland in his <hiy 
where nails were used as moiu y. The ii'eneral use of 
hnllets amoii;^' the American pioneers in the cliase and 
III warfare against the Indians made them i^iiod 
^ '"chaii'^e"" ill the early days of \ew Kn^land. In the 
liistoiies of (ireece, w f reail of the \n\;j;c and hea\y iron 
-; (oius of S|)arta, whii-h snr\i\-ed he\i»nd their timt on ac- 

■ eoimi of till' hostility • \' the Spartans to ti'jule. 'I'hey 
s((iiied purposely to ha\e retained a most nnsuitahle 
form of money for the ])iirpose of hinderiiiLt- exi-han^^c. 

The (It elopments of hettei- methods ill minin<4' and 
: smelting the commoiu'r metals such as hron/e. iron 

■ and tin made them nnsiiitaiile for the currencies in any 
form. 'I'heir defect was in their ciimltersomeness and 
ill the dilliciilly of carryiiiLf thi'iii about. 'Idle jn'ocess of 

i ( limiiiation lie^'an with the eheapi r and tht hea\ mi- uiet- 

■ aK. until at last the sole sur\i\ois were sil\( r and i^uld, 
' cept for the \»'rv smalkst of c.iins. 

i^vou-rroxo, ,,n:sTAN,)un,c,rvu.rK 

l'f<„ tnV.i ■n„i Ion, I • ''''<^*''"^' HiaptcT |,a,l 

Hu-ir scarcity and (he 

tlu. carli,.,. funns v ' ^^^ ''^ "••'''^'''A^- ''m most of 

'- ;-.«••::" ;.Jn::;:l,;;^;;'':!;:!::::,'':': -•: 

•'1. C/oo^/ r///^///7/V.v.~HntIi i,.,f..l r • I ■ 

"' '«i-../ K.i, s„ :'''v:'.- ';■''.'>■ ''"-'■!'■. 

'"''I .-ukI silver- 

''•'\' '••"•«•(■ value in sinal! I.nll. , .. . "" •' 


^■licapriiss (.r siK..,. 

'"^''^ '•""- ^''"'""'A^l' tlu. inm.asin:. 

I I , 

" '" '^^ ;i"aii.i()iinnMl a 

s a 

i:\Ul. ITION OF Till: STANDAKl) OF \.\l,li: K 

'lie liis- 
law of 
nil the 
tr liad 
;ils /'()!• 
I ^reat 
lul the 

lleni ;i 

lost of 
' statr 

) that 
icil ill 
llie ;| , 

to its 

se ill 


IS a 

inoiiev metal within I'eeent yeai's. 'I'hise metals are 
peeiiliai'ly adajjted to the |)roeess of eoinaye. arid eaj)a- 
hk ol' l)eii!Li' eliaiit>ed in t'onii. si/e and sliapi' without a 
^|)eeially ditlieiilt prot-ess of nianul'acturinu'. 

To a\ oid the di\ ision of sil\ er and <4old into (juantitics 
so siiiall as to he inipi'at-tieaitle in handling', the baser 
metals aic ^^cnei'ally used for eoiiis of niiiior \alne where 
till' defect of small \ahie in lariic hulk does not a{)j)ly. 

.")■_'. I'Idlitiii III niisiu-ci ssfiil as iiniiu//. Of the moi'e 
e\pensi\e metals |)latiiuim is tln' only one . liieh has 
lirri! tried as money. In 18'JS the Hnssian (Government, 
which owned the principal platiimn. mines. I)e<ian to 
coin this metal into pieces of three, six and twelve ru- 
lil( s. a riihle then heinu' worth ahont 7.") cents. I^latinum 
has s(\(ral (piahties which lit it for use as money, par- 
ticularly its (hirahility and its oreat density, which 
iiiakc> it easily (list iii'^iiishahje on account of its weight. 

I "urthennore it oxidizes \ cry slowly. 'I'he experi- 
iiKiit. howe\ ci'. I'cxcaled si'\fral fatal ohjictions to its 
use as com. 'I'lu re is no ureat amount of it in use in 
commerce, so that the \alue of it is lilvcly to he \ cry 
unstahle. Heeause of its extremely lii<>li melting ])oint. 
Ihe cost of maiiii i'aeturiii!' the coins was wvy oTcat, and 
it coidd not he ea^dx con\trted from hullion to coin and 
from coin to hullion, a feature which reiidi'ivs i>'('ld 
and siUer \ei-y siiitahk' for money. Thcsi.' objections in- 
duced the Russian (ioNcinment to abandon the cx[)eri- 

II Mil I in IHl."). 

.").'{. (Ut'jiciidiis f( <^()U1 (t>i(l silx'cr. - (\n\{\ and sihi'r 

III hullion form arc b\ no nuans the ideal monev. Thev 
are dillicult to identify at sinht without the use of tcst.s, 
\\hieli ;ii( too ( laliorate for oi'dinar\' use. so that it is 

ras\ lo eoumei'l en liieiii. 

1 iic\ aiso are an cetcu i)\ 


ear and the (|uestion of loss of weii^ht in handling has 


^"'M:^ AM) I{.\\KI\(; 

;'^'i'nc.slHvn.s.nousn,K.. Inn.: 

"t finics rsjKvfallv, 

])rnhh,n. or ., sen. "' "■^■■■'^^■'' "">"c'tarv 

^ .MMnnsnahnv. asuasilinst,.alc.,lhvth; 

'" •^"^<' ayifalion ( Hr in.' tlic r.vf * 

.>». ro/,/.,.;<, ',>,,^. ,i,,^j tuo.Ic.f,,. 

^"^'••I'ln'ilitv to u(.,r .,n,l -^ -';'•""*". I.e.. f|„ 

;•"■'■'■"""■ I" " ''■■•i.,„ ,„,,„ I,, , ,,„;".,,,'■': "'',' 

•' 'l'"iililv ,.r „iil-,l will ., ' ■•tanip„,„ „| 

■rni-i:..„i„„, ,., ,,i- ,,■' ''■''"'"' ""«•'"■''«■■ 

^'-'i-' '-,„,„ 1 J;;:, ,:::';: ';','"'-;: 

^IVUiiia. in nr.l.T t„ r-.cil.>.,h. ' '"'"' "' 

"■■■?:'■':! ^' -I-' ■H.,,H,,,i'-;;:::;:::; '™'''"'' 

•'■I- -'K'ncv (./■ ,■(./■);«- 'I'l :. 

'■'"";-■■ ■'!'"■ "•■'■"<■ "!• till' K„„ii,h ,„ 

l''-('ncli con. liviv dl,,. i.',.,,. i , "'' "''' 


'"'• "'-''"•■•'ted tluv uVrc 

'";;- ^'-H..!:;s.':.,::,i;::::i'::;:x.'"""'"'''-^ 

'« ^^.is un[ In,,,,. |,,.,np<. H •' 

^•l"il<' lil>-lv that l|„ |,.s , ''>"'"'ses. it 

"—.I l"i.';::/"'::r;;r:;:;:;':;-'"™' 

' Hie iiKlal or sul). 

"■••!<•(■( tni, 11 III,, v).,, I ■- "i»-i.u or suD- 

cn'ciiiiiv. n( II,;. I . ' • ""'t"'i'>i<-'. I () 

,,,,,,.,, , ■,; I'i'^H, .(•(.. rile .stamp in,.,,, t|,. 

eoiii \ 


n. we 





i:\()i.ri'i()N oi riir. standaih) or ^.\LI i: t: 

so as to make dilHcult the iihstractiou of any ^)ortion ol' 
it, and besides to inserihe on \hv eoin the name ol" the 
person eertiCyin^' the wein'ht. 'I'o |)revi'nt the wearing- 
away of tlie inetah it heeanie enstoinary to mix in the 
coin some liarder metal, ea'ded alloy. Auain this eon- 
venient (k'\ iee was ahnsed. and it was fonnd prolitahle 
to inli-odnee into the coin a i>Teatei- amonnl of alloy than 
was enstomai-y. 'rheren|)on it heeanie neeessai'y to in- 
dicate in some way the fineness of the metal. 

.■)»;. Jii'qiiiri'iiicnls of ^ood ci)iu(i;i^c. — At this stage of 
coinage several considerations had to he observed: It 
was necessary that the stamp njjon the coin shonld cer- 
tir\- that there was a certain amonnt of metal of a cer- 
tain fineness in tiu' coin, that none of the metal had been 
abstracted after the stajn|)ing of the piece, that the 
(K\ ice co\ ci' the whole face of the coin, that it be ;^'nar- 
antced b\ some reliable j)erson. and that it shonld be 
diflicnlt to connteifcit. The i^reat a(lvanta<rc to com- 
merce in ha\ ing <4ood coinage led to the gi'adnal restric- 
tion of the I'ight to coin money to a W'w i-cliable ])crs()ns, 
and finally to tlu' so\ereign himself. 

This restriction of coinage, howc\er. did not elim- 
inate the abnses which we have mentioned, for the royal 
antliorities foi' man\- centniies made large profits by 
debasing the coinage, both by I'cdncing the size of the 
coins and In incicasing the amonnt of the alloy in them. 
'I'his fact can !»(.■ easily demonstrated ])y reference to the 
coins of to-day. The English ponnd sterling. whi( h 
originally rcpriscnted a ponnd of sil\( i-. finally came lo 
represent abont half that amonnt. 'i'he people became 
so accustomed to receiving coins according to theii- face 
and without reference to their weight that the debased 
coin of similar wei 


as ever. 

ght had the same pun-basing power 
The needy monarch conld melt up the old coins 


mcim;\ ,\m) dankim- 

' '''■'M.--S I,,, „.„,„. Uk- sa„KM,aHK^ ..,,Kl Ih.s „„.",:. 

':''•''- ■IP.-C-.I "ili,,,,,, p,,,,st. If,,,,,- VMI 
' I 1-MKla .1 ,l,st„,j,„isl,,,| hi„„,|r l,v m,oatal i.- 
'lNlKOlKv m ll„s |„„lilai,l<- prarti,,. • ' '" 

,.,'■'/';"'''''"' "'"'": ""I '-'il'l-'S "I- coi„s wc-c ,, 

:''"'■'■■'••■■".;•; -■ -^^ ti,™- iK.t .!,„ ,>.,. ' ' : 

""■",' '" ''"I"-'- "■.■.>!„ „, H„,,„,^,- ll„.v 1 , I 

"""■'."-I""' ■■•'■ ^y --,i„« and , ,i : :' T 

-;<'Kli ..I,. |„„«, „,|,„|, „.,„_,.,,^,_| j.„.'',,„|„„. .■ 
«i■<■" l,«hU.,. an,l lio.,,,,,, nntil. in ia-,2.™ , 

.-.7. A/,,,,,/,,,,, /■ ;.„/„,...„,■,, ,„ ,|,i, „i 

.^1"H,,.,I,I,. M,l,,,.,, ,,r„K.|aMi..„,n,,..vr,,,n,|.c. s, ;r 
I'",'"',"' ''^''""•'i""-^anK.di„n,nr ,,,!,„ :,'.'' 

••■-;'^«.-Mnn„.s,a.vnn»,v. .,.„,,,,,,,;,,,,, 

"'"■ "" 'I""'""' "I H,c Innrtiun nf „„.|..ii:, 

"".""■:\^'^ •■' ^'^ -■•l"|-valM. invn|v,.s,,nd..d"!V: 

|)niici|)lfs. * <''ircKiu 

15y a slan.iani or vahuMv. nu-an tlu- ,:sr of a met-,1 .s 
a (iic.'ism-.. f',.,. )iw 1.. ,. .. .. 'I liituu as 

.. , ' '" '"' 'i'!<-T coniniodities Tfw. 

i;\()Lrri(!" oi jiii .^^.\^l)Al{l) of \aui; 





stiiiitlifd is stal)ility <»!' xaliic. Since Naluf is tlic result 
of a(l_justii ''lit iR'twcTii supply and (kiiiaiKJ. it is ()l)\i()us 
tliat our slaiuiai'd nit'tal must not l>t' suh'ix-t to excessive 
tlnctuatiiins in eitlici- of tiiest' jjai'ticulars. Tlie prin- 
cipal nion( tai'v ))ii'l»i( ins !)!' the past centui'v lia\ e arisen 
out ol' conti'o\ eisies rcyardinu' IIk' standard. 

In ancient times Itotli i^old and siher were used as a 
standard, and no dillicully rose tlieicl'roi'i. pi'incipally 
because there were no t^ri'at clian^fs in the supply ol' 
!'i(se II ':iis a, id I)ecause trade was so pom-ly de\t'loped 
that di\. r^cncies in values were not impnrtant enoUi;h 
to create serious inconveniences. It is only in communi- 
'it> where industry ami commerce arc hi<^hly organi/A-d 
t!i:it small chan;i,-es in the measure of \alue are iiotii'c- 
ahle. The case is similar to that of en<iineerinu': I'or 
' xample, in e;n-li( r times id" cruder cons! i-uction there 
was [)ractically no need of very ai'curate mcasui'iny- a|)- 
paratus. Diirercnces of a fraction of m inch oi- milli- 
inet( ! could he disii<;ar(l( <!. A\'ith improved teclmiciue 
a d finer pi-whlems, it is nec-essary ' have th<' utmost 
accuracv in UKUisuremeiit. 'i"he standard of value is a 
iiieasuriir'4 appai';itus i'or values and it is only under 
hi<ih.iv deveIoi)ed commercial coiuutions that minute ac- 
curacy is essentia). 

.')S. Ddiihlc .slfimJard pussiJAc iniliJ hist rcntiir/i. — ■ 
Uuritii'- the Middle A<>es. <>'old l»ecame so scarce that sil- 
\vv was })rac-ticall\' the only coinage, and so the Vai- 
ropean nations v\( : on a silver standard. The i'all in 
the value ol' silver ai)out the time of the discovery of 
America created a demand foi' coins oi' "^I'cater value in 
small hulk, and as there v\ s ;i uiciitir production of 
_U<)1d at this time, the use of u'ol I'oins to.u-ether with the 
silver hecaine more common. 

Tt is impossihlc to understand tile intricacies of the 
\ II I 


M(>\i^ \\i) i{\\Kr\(i 

.sf-'iiidard .|iKstin!, iiitil ^u k,i,.u jiisl |,n-.\ III, vainrs r.f 
tlir coifis nvc (l.t'/n.ii.K.I. n,,t|, silv.r jmh) -,.|.1 ;,,-,. n^,! 
to .s;idi ;,.; rxtrnt in the .iris lli;.t tluir .nine is (Ktcr- 
iiiiiK-<i in lai-of nuasurc hy the dvuv.i'.ul r<v tlicm tli-ir 
in reliifion So the supply. Tlu- iinnt. .-nr al\va-,s ohi.i-v.i 
to (Iran tlicir '-npplx of imiiion from the (,p,n i::arkct. 
and unless thry <.fier the market priee they are uuahlJ 
to obtain any. 

Sui)|)(.si'. for example, that the s.ipply .,l' ^ih er -rad- 
u.dly diminishes while the demand I'or il in he m-irket 
is maintained. Xatnra.lly. the prodneers of silver u ill 
he ahle to oiitain heiUr terms for it th;>n before. .Jew- 
elers and other i)ersons wishing to use silver in their 
business will melt up silver eoms instead of purciiasin.,^ 
the bullion at the hi-lu r ))riee in the eoina.ue. l^jide"- 
these conditions, peojjle wr„i|d hemn to disenminate he- 
tueen silver and .uold eoins. selling- the silver coins to the 
jewelers at the premium whieh would i),-oI)abK- be of- 
fered for them. The (Government would be unable to 
H'ct silver for coina-e purposes unless it ,yave a much 
larger sum in <.(,|,| |',„. jt. ;,,i(l if the C Government simplv 
^ave hack the silver in the form of coins, these coijis 
would (piickly retire from circulation. 

oO. Grrsha Ill's Latc.^Thls principle is called (Gres- 
ham's Law. named from an ollicial in the reiou „f 
Queen Kli/aheth, who first observed this tendeircy of 
people to discriminate between two coins of the same 
nominal value. The simplest statement of this law is 
that the cheaper money tends t.) drive out the dearer, 
that is to say. when the peo|)!e for any reas<.n beoin lo 
discriminate between two coina;«-es. they will invaHably 
l)ay out the inferior and will hoard the better, thus re- 
iuo\in<4- it from circulation. 

The only remedy for this eonditioii w(iul(l be for the 

i:\()i r'iit.N ()V Till; s'iandakd oi" \.\i,n-: 



mints to cnnslaiillv niter tlic aiiioiirit of nittal in tlir 
I'oius t(i coriTspdiitl to tlnir coiiiiiMMjity \altic in the mar- 
ket. (Jold ar.d sil\er are so easily transuofted I'rom one 
(■(UMitry ♦<> anotlier that ehan^'es in theli- \alu',' at an\' 
['.iiticnlar jilaee will (jniekly spixad thron^hont Ihi coni- 
intreial world. I'or ixai . iC ;i new sihc-r mine is 
diseoiei'cd in Son''! Ameriea, the inereased .supply oC 
>il\er at tl'.at place will hiwei- its \alne: tlic producers 
will oirer it on easier an easiei- tei'ins in ex(iiap.<''c I'or 
i^old or anytliinf.^' else oj' valne. Silver w ill ayain l;egin 
to he exported, for it will eommaiid a hi/^her 'j)riec 
ahroad than at home, hot the I'esnit of thns increasin<f 
the sujjply in other countries will lower its value there 
until a new e(|nililH!nm is estal)lishe(l. 

li is of course impossihie I'oi- the mints to contiuuallv 
alter the ([uantity of metal in the coins to cori'ispond [-, 
tiieii- ni;ii'ket values, l'',ven il' they did so, the old coins 
!ii circulation woidd lia\e a \alue either o-re-iter or iess 
than their face, which w;)ul(l cause one or the ovhjr of 
I Ik in to I'cHi-c fj'oni circulation. 

tiO.,(s of idrlji l(\^isl/il(irs.-—'Vh\s tendeney of 
UK t.ds to ihu'tiiat*' in value was no! ur;derst(!od unli! re- 
cent Iw and the i2'()\ ci'nmcnts were constantlv tr\ ina' va- 
lii us expedients io force the circidation (,f ),ioth metals 
111 till' face of natural laws to the contrary. As is usual 
\\ith Icii'islators and otHcials who ai'c ;lealini>' with a mat- 
li V which they do not uniler.itand, they souuht io deal 
with Ihc symptcMus rather than the cause of tlie trouhle. 
To this 'lid they passed hr.\s foi-hiddin^- irade in llic 
liiccious metals. 'I'luy placed ohstaeles in the wav of 
export ,".nd import, 'i'hey made )neltin<4' th.e eoms a 

Ci'innn.'ll ofVcll'a- \ >.: iv ii>-.iiMi \>Itl) mwrii'iit ifir> l-i.^c l^i' 


this character, they wire im])o^sihle of exeeut 
Acre constantK' (\aded. 

lOtl, 111 



^I()^]:^ wd hankinc; 

<il. J-Jjjicricnic of En^;l<niii :Jl/i timihic slaiuhird. — 
The ti-iK soliilioii (,f tlu'sf tlillic'iiltits was first rcaclicd 
in J'Ji^laiui. This comitry had had h(.r share ol' the 
loss and vexation (hie to ehaii/^ts of the ratio. Slie had ^ 
also \ isiled erncl puiiishineiits on iii(h\ ichials I'oi- niejtiiin- 
and expoi-tino- tlie |)reeions metals. All attein{)t.s to eii- 
i'oree thest' t'oolish laws wer" e\entually ahandoncd, and 
it ( aine to pass in the rei<;n of Charles I I that the ouinca 
of ^old. althon;^h proclaimed hy loya! authoritv to he 
the e(|n!\alent of :i()s. in siKcr. passid in trade for 'Jls., 
and no attempt was made 1)\- the noxernment to inter- 
fere. Tile Huinea I'emained as a trade coin till tlie third 
year of (Jeoroc \ (1717). when anotiier proclamation 
\' ;;s issued inakino^ it legally e(|iia' to "Jls., at which fig- 
ure the I'alio to sihir \\as ahoti* i.") 1-.") to 1. 

As i4()Id was sliuhlly oxcri'atid at the I'atio of I.') 1 .■), 
tlki'e was a tendency to ( xpoi't sihtr: and for this pnr- 
|)ose the full-W(iulit coins were scleclrd. So it came 
iihoiit in the course ,,f li;,!f a cenlury that 'he onl\ 
sihcr coins i-emaiiiino- in circulation w<!'e those which 
had heen \\\\\v\\ I'educid in wii^hl h\- ahrasion or h\- 
tVauihdcnl clippino-. 'I'll,, (vil In came so intoK'rahk' 
that ParliauHnl. in 177 K passed a law pro\ idin-; that 
-iher c'Mii should not !»r le<_;al t( ndcr- for more than !.'•_'.") 
in one |)ayiii(nt. e\ce|)t hy weight at the I'atc of ,)s. 2d. 
pel- ounce. It was enacted at he same time that H(,!d 
coins deficit tit iti W( iyht should he called in and rec lined, 
.uid Ilia! tlure a fter such coins, i I' under a certain weiulit. 
should not he leo-al tetidci at all. The restriction of the 
\v\X'\\ tendt I' M' silver w;is |o (onlinuc two \eai's. The 
c.\|)( I'lalion of l*ailiam<nl was that some rfl't'ctual and 
J)criiian(nt steps would hi taken lo Ava] with the e\ II 
of liuht coins in th;d iulei\al. hut since n<.lhinu' ^^-'^ 
done, the a<'l ipf I 77 I- w as n riew < d in I 77<'' lor two \ .'ars 



r.\()M 'ii()\ OF Tin: s'l.wDAiti) of \ .\i.ri: 


I" the 
L' had 

() C'll- 

, itii(i 
t.) he 
•J Is., 
at ion i 


'- 1 

\ hich 
r hy 


r thr 





In ITTH it 

A\as iHiK \\ «,(l lor .s(\(ii \fars. aiia 

Ih^ii hy i'c|)(.att(l rc-iRuals it was cai'ried forward to 

17'.>H. iViiothci' clause was now added that no more 

il\er should he coined at the mint for prixate ])ersons. 

CiL'. Adoplioii uf siii^lt' :^<}l(l slduddid iniiiitciilioiKil. 
—The si^nificauct' ot' this ici^islatioii was not j)t'i'cei\('d 
at the time. It had not ])vv\\ the intention of Parlia- 
iiiciit to estahlisli the sinolc nojd standard. The (jues- 
fion of statidard was not undci' consideration at all. 
What Parliament did in 1774 was: (1) to put "old 
coin in a state of perfection hy recoinin^' the defective 
pieces and making" liiiht coins una\ailahlc in paynunts 
!h( I'caftei': ( '_' ) lo limit the Kiial-tendta- faculty of the 
siUer money theti in circuiation. The mint \\as still 
iipt'n, and anyhody could ha\e siher hullion I'oincd into 
money of full wciyjit and full Ici^a! iendri'. jiut since 
siKcr was uiidcr\aluc(l at the I'atio "A' 1 .") 1 ."i. nohodv 
would take it to the mint. Thus all the conditions of 
the sini^lc uold standard were in pi'actical opeiation 
without any fixed intention of I'ailiamt nt to hring it 
ahout. or any know Icd^^c that it had heen doni'. 

it was noticed. l)owc\(i\ that 'he inconMiiic ncc s of a 
^hiftiiii^' i';iti(t ha<l disappeared. Tjicrc was pl(ni\' of 
Li'old money foi' laruc transactions and of siKcr monev 
\'i>v small ones. AithcMiuh tii' siKci" coins were dc- 
lici( lit in weight, thcv answered tin purpose s of small 
ilianLtc. After the experience of a (|uai'tcr of a cen- 
liiry. I'ai'iiamt nt and |)eoplt v.'.yr com inccil that the .\ct 
of 177 ^. although adopted as a temporary ?ucasure, 
oiil;Ii1 to he made pi I'manetil. .\ccordin;4ly it was 
iikmIc so ii\ I7!M>. 

^ ( t it was not until ISlti ih;d the true | liIlos()ph\' id' 
the sfip w;is w<il enough iiiidirstood to Mcnit its en- 
actment into a settled law. In thai \;ai- it wasenacteil 


M(»\l;^ A\l) 1{A\KI\(; 

<|>--'l t H. o,,|.| c-oiM ..(• tiK. renin., whc, of r„ll .vci.-ht 

.^HouM he i nil K,,.alU.n.ln- and should Ik. .oincdn^^^^ 
Pnvac p.-rsons tn any an.onnt. and thai s|h,,. ,,,in 
■si'"uhi not Ih. !.,uJ undn- lor n.on- than lOs. in one 
l'-\vnK nt. ..nd shonld h,- .oin.d onlv on oonnnnrnt -u- 
;•''''''^•^,.KhonldlK■^•dncvd,..^v,;,H■rcv.nt. This 

i-v. wind, .stahhshnl th. sinok. .old standard, rcn.ains 
in toi'ci' to thc' present day. 


o hinnd.r upon or have, thrnst npon h.r , institu- 

^">ns uhu.h oth.r n,untri..s an,UMv oulv' after nuu-h 
->"sn<>us Hlor, „„, ,,,,,,aps revolution." l^.side. the 
Kold standard a ureal many ,.xcvlk,,t iV.atuns of ...ov- 
enmu.nt the. dual houses or IVuhauKn.. .h. nspon- 

";'7"' ;'"''•■•''-'•'''•'-' •"'•''nionare-hy.e.t...u.i,hMK. 
(■it'.d on this poiiil. 

•'•iyl/////,v,v. Tlu. key to !h.. nnderstandin... of the 
com|.le.x pn,hK,,s o, ,h,. ..and irds i. . 
"" "iin',n.orn.i„auv ,.u.d oflh.. Inllu-ne,. of the 
"""ts upon values of, he pr-e.-onsnutals. .V unni is a 
'' , , ^^■'"■'■•' *•*■'•'•••'" '•' 'i"i<*' -in.nlilies of th-. previous 
"'y'^'l^ ;;••<• stamped with a deviee or inscTiption. indi- 
<'^"'"i,- the ..xaet,,uantily of metal in them. .\ , hefor.. 
"'•"""•"■''• "- •■••"•li'-t inse-ription^ .ere literal stat,- 

';"'";';''""■"'■'-''*"'■""• ""■'••'I ••""laiiud d.ivm-the 

'■'■'-'''' '""""' ^^'-'^ ••' l"""id of silver, the Famhsh 
I-""v.n pennyuei^h, ..r.,K,r. "I he sole runel,.:;, ..f 
""■."""';^-''^'"i'" "" "letal In.oa ,orm mor,. eon- 
^";","' ';"• '•"■'•"'•"-". II .(r.el.d the v.lne of the 
''"'''^""'> ^'■'■^"•^'•^"'--'"npinu.inereasedlh.irnlii,. 

'■ "^ V'"'''"''""-*^""' '•'■•^^'••1^'-' add, ll.nal 
dm, and for tli(.m. 

'''''"1""""'^ ""•••''^ ''■•i^'M Miarkel v-dueexaelK the 

AOLI'I'ION Ol' IMir. STANDAUl) OF VAI.I 1. r,r, 

line as aiiv otlic- coiruuHimts 




ns mar 



llia-tuates iccoi-dinu' to ti.c laws ol" sup])!)' and dcniand. 
\\'luii tlicre is oidv one nutal in use as money 

the 11 


!l I 

ts market value can 

hv measured only by 


IIk' rise and fall of priees oT other tlini<>s. | |r; name 
•■dollar;' 'iMunid sterling/" ■'i'rane/' -mark." ete., are 
simplv terms in(lieatin<4' weight, not value. The name 
•dollar" tor example is merely another name I'or a eer- 
tain definite weight of o(,ld. i. c. -J.'i.-J-J orains of pure 
nold. A eonfusion of thought arises heeause the values 
(d' everythinj^- else ai'e indieated by eomi)aiison with the 
dollar ol' gold, r.eeausc tlu- amount of -^old i.i the dol- 
lai' nevei- .halves ixeept In le.uislatix <• enaetment. peo- 
ple fome U) tnink of the \alue ol' ,!^'old as heino' iixrd 
and unehangino'. In a later chapter on the relation he- 
twicn oold and priees. we shall work out this idea more 

(i-l-. Liual tciKhr. In the Middle .\gcs. wlun there 
Wire a ;;r<al \arittv of coinages in concurrent cireida- 
tion. it was ni'cessary that there shonld hi' some under- 
-.tanding as to the relative \alues of this heterogenous 
coinage. .\eco!'(lingly thi' duty was imposed upon the 
uoxirnnunt (d' preserihing the \alue of all < Iher coins 
111 t( rms of some one partieulai- donu'slic coin. These 
roval proclamations ol' tlu value of coins really had a 
lorce of legal tender enactmeids. heeause a creditor was 
'•■.iiipelled l)V courts to !-ecti\f any of these coins at ds 
l„,>trd \alue. Legal tender means any medium of ex- 
change which m:iy he ten !( red in paxinent of deht. and 
\Uiieli must lie rec<i\c.l oy the creditor whether he is 
willing or not. 

It was ol)v'r\cd early that there was a 
lor certain -'asses of coins at certain limes to disappear 
ir,.ni eii dation. Thev sure t itlur hoarded or melted 


-MoM;^ AM) |{.\\KI\(; 

;'P f'"'"^^'"'ilH'.Kn.ur..u.t,nvor;,..vdrvnr|>latror 
I'^'y^^ •■■•;• -^i-H.<l. In nnkM- to p,vu„t this the mints 

*;yM''^>'tivrr.huvdth<.anH.n,tornH.talin th.c.^^^ 
^'tt^;"<l tn rhcrk thc^ Icn.k-.Ky hy hnvs prohibiti,,.. ev- 

P'"-tnii4' or MKitinu. or the- c-oins. Onlv the fonmror 

tlHse nic.^„ivs was rllieacinus in cheeking these tend- 

^-nnes. liHore. h<.^^e^e,•. the .•o„.tant alterin- of the 

n.inaoe ui(hiee<l n.vat e(.nriisiM,i i,, trade. 

<;.->. ///>/o/7/ o/ roina::r In the Cnihd Sfatfs.-Thv 


^•^'tes.soneorth.. Minst mst ive rat ions of the I 

Jaws uovern the tinetnations „. .ah,e oC th. pre- I 

-.ns nntals. The (ir.t se<.,H.tary of the treasnrv 'va^ I 

- '■■^••""I<T Ilannlto,,. an.i he was the statesman" upon ' 

"'"""''V^'' "''■'''"> •''■^•'•-f'Hoaplanlnran.on. 
.tary an<l ha., km- svsi,.,, for th,. new eo„ntrv 'i le 

"'^:<l""" "f rx.han-e i„ e.renlatl,.,, at that ti'n.e wa^ 
• "■'•'^•M'.''!!,v Spanish an.l Kn^hsh ..K er eoins. ,„■ paper 
;'"";;■> "'"'-•"''"■i.s. The p„u..r.iK.n toC-on.,!ess 
"'. "" ^""-^'''"l-n of reuuh.finn thr rah.e of Coreion 
«""is uas most nnpoHant at that time h-eause of the 
Ai-reat variety I„ .-irenkation. It nas nee.ssarv to have 
-;nie anthonlall^.. vahiation In onh.- that pavments 
""-''' '-•"■"I' ^^itlHHit n-imrinoth. partus to eomr to 
.•li^rcenu nt as lo the preeisr nirans of pavmc nt 

'•"i/wrv/..//o„/.sv7.v//o,.o/r/. /.--../. 'it was part of 

tlic- pkn, of 1 1;nniIlon to .stahhsh an ( •ml, ,1 Stat, s mint 
■so that th, . .m.i.vmi.hl he snpph. ,1 u 1th an a.h .mat." 

'"""""' '"■ ''"""1 States eoiMs in the shortest possible 

'"'"■• ••""! I!'"^ -• .■|^^.■.y uith the eonCnsioM of th,. mis.rl- 
''";-'<s eon,;,,,.. II,. thought it n-nssarv!oeoir, hoth 
,U"l.i.UMlsih,.rinor.krthat this pnrpos<. ,niokt he eo.,- 
^"""'■'•""' '-'^ '•■'P""^- •- I — 'M<'. If.' fiv..l upon the 

ratio o(' i:» to I as 

ii'I"'"'^i"iatin,M most e|,K, K d,,. „,,,,.. 

i:\()i.T"rioN or Tin: s'iandahd op valfk r 



k(. t \ allies of tlic metals at thai time. The unit of vahie, 
the dollar, was () vitd upon heeaiise of the familiarity 
of the j)e()|)le witli the Spanish dollar, and tiieir custom 
of <|Uotin'>' prices in that standard. The opening;' of tiie 
mints to the coinau^e of silver and Li'old at the ratio 1.') 
to 1 .iieant the free coinage ot' hotli metals. T'iie mint 
stood ready to accept <ra\(l and silver, to convert them 
into coins, and return tiie:,e coins to the person i)rin<>ino- 
the metal, char^in^' him a \ei'} small fee for tl>e alloys 
used to hardrii the coins. 

(•T 1 11(1 Hide// of the ratio (iiid ils cflUls. — The plan 
(lid not work ■ iit as Hamilton had intended. In the 
Mrst placi' the ratio of 1.) to 1 had ceased to re|)i'esent 
ihe market ratio, when the mint was finally I'cady for 
coina<,e al out two oi- three years later. According' to 
'he u'reat Kuropean authority on the market values of 
the ,irecious metals. Soethecr. the actual market I'atios 
were as follows: l.)..'J7 to 1 in 17!>1-, 1 ')..">•') to 1 in 17i>.'). 
l.).*;.") to 1 in 17'»<;. l.").4.| to 1 in 17!>7, I.").")lt to 1 in 
17!>H. 1.").74 to I in 17i>'.>, l.).tlK to 1 in IHOO. and l.).4() 
to 1 in IHOl. Till se chan;.ies in the market ratio indi- 
cated that the tciKlcncy of siher with. I'cspi'ct toxoid was 

I'nder these circumstances noliody would he so fool- 
ish as to take j.'')l(i to the mint to he coined. It was 
!iiu(! more pi'o.i ,d)li' to take that <4'old and pin-i'hasc 
siUer \'.ith it in the market, and tlu'n to take the 
silvir to the mint and have it coined into uiore dollars 
than the !4i>ld would jia\e made, and each eajiahh of 
purchasino- the same amount of conimodities as a ^old 
dollar. To make this ])roposition as cleai- as possihlc, 
li I us tidxc a concrete examjilc. 

Suppose a dcalir in hrdlion has one pound of ^'old. 
it he wishes to convert it into a means of |)aymcnt. he 




may do one ol' two tl.inus; first, 1r. may take it to tiic 
mint ami liavc it coiiitd into approxiiiiattly -JM) dollars: 
second, he may vwhiuv^v the o(,|,l hulli,,,, for silver bul- 
lion in the Kuropean market. I f the market ratio hap- 
pens to he ir,l . at this time, he will ^et i,, exehan-e 1.51 .. 
pounds of silver. This silver he may take to the mint 
and have it eoined into approximately •_>(;() dollars, eaeh 
or whieh is just as u,„„l as any no|,l a,,!!;,,. f„i. tl,e j„„.. 
pose of trade. ( 'nder these eireumstanees, whv should 
anybody take ,<.„1,1 to the mint when there were always 
dealers ^^hn ^^vvc eaoe,- to make the profit whieh eould 
Ik- had by purehasino- his u,,l,l h„||ioM for silver dollars, 
t'xportino- the o,.],! t„ i,,,,. c,,,,,-^,, ^:|^.^.,._ .,,j^, ^j^^^^^ j^.^^._ 

in- the imported silver eoined in order to buv more <.(,hl 
'"'Ihon^ Here we have an endless ehain, automaticvdiv 
causinu- an exj^ort of n,,l,l and an import of silver. I 'n*- 
der these eireumstanees no ^,,1,1 „as eoined, „f t,„„.se. 

<iH. Disappcarainr o/' the .sihrr ^/o//a/-.v.- ^Hamilton's 
idea of supplying this new eountrv with eoins of its own 
i.iintaoe was further frustrated by another peeuliar con- 
dition. It was very s<.<.n notieed that in spite of the coin- 
age o( siher dollars at the mint thev did not seem to re- 
ii'aiM m c-ireulation for Ion-. Instead the old Spanish 
<;oinane eontinued to be the eurrent monev. Of these 
.Spanish and other foreio-,, (,,ins, ,,nlv those whieh were 
H1PIH<1 and mutilate.l Mere eurrenl. Perfeet eoins 
were either mm.,, ,-edueed to this same eonditio,, or disap- 

''^"7;"''""'""'^-"''''i""- 'I'lu' Spanish silver eoms were 
a' this ti,„e full K..,,l lender alo„o ^,,11. the Tnited 
Myites ...„,s. I„ ,|.,i, ,„,,,,,,, ,,„dition Ihev we.'e 
^'';4-htlv heavier than Ihe An,e,-iean eoni. Hnth" in this 

'•'"7*7— •'""- W.S.Indies, uilh.hnm at thai ti,„e 

;:•■'">•'•' ve,-y extensive t,-a,h.. both eoins pasMul at their 
'^•'•^-alue without anvd,MTi„„„ation SIhwv.I t,ade,-s 

i.\()!.i rio.N OF rm. siandaud oi- \Ai.ri: 



Inuntl, however, tliat they could make a |)rotil: exportiiin- 
the new Ignited Stales silver dollai's. e\ehani^iii<^- tlieiii 
ill the West Indies i'or tlie hea\ ier Spanish dollars, nielt- 
iiio- these liea\ier dollars into hullioii. itnn^in^' the liUi- 
lioii to the Ciiited Stales and ha\ iii^' it eoined into more 
than the oi'i^inal niimher ol' dollars. 

When It was discovered that the eoinaoe of silver 
dollars was simi)ly adding- to the profit ol' hiillion 
(k-ders instead of sni)plyin,u- the country w ith currency. 
President JeHVrson suspended the coina«ie of the siher 
ilollar in IHO*!. 'I'his unsatisfactory state of the metallic 
ciirreney of the country was not serious heeause of the 
almost imixersal use of j)aper money at that time. 

I'l III IMMiSS (ir M \I1KIT Ii\Tl(l HriUIKN del I) AM) Slivill.' 

^,,ll■. Uatiii. Year. Italio. Viar. Ratio. 




'^ I -111. 


* iMMi 

iMiT lj.l;{ 

4 1-(W Ki.OS 

I ISO!) !.>.!)(! 

i I- 1 (I l.VTT 

l-ll 1")..".;! 

i-i." Hi. II 

|sl;{ iti..',-, 

jxU Ij.ol 

l-l.> l."...'() 

l>lti 1.5. -'8 


isiH l.j.:ij 

isii) i:,.:« 

|s.>() lj.(i.' 

Is.>l l.-,.!)j 

IS.'.' i.vso 

|H.':{ i.-,.sv 

Kn ij.s.' 

!».'.•) I,V*(» 

is.'i; i,-,.7(i 

ls.'7 l.>.7l 


ix.'<). . . . rv7s 

I C'lmipil.'il li\ tlu Dm 


isil . 




1 ■, !i;i 

1S:{.; I.).N) 

is;{() i"..7.' 

IHU7 I "..Si 

isss i,-,.s,, 


I-' ID I. ■..(!.' 

Isu 1 "..7il 

lsl.> 1 VS7 

isi:} I ■..!•;! 

ISU li.K'. 

IHIJ IV!!.' 

ISKI I.!»ll 

isn l.i.hO 

ISIH l.).H,> 

ISl!) 15.78 

ls.',() l.i.70 

iH,-.i \r,.i(> 

IH.).' 1.5.j<» 

lH.-.:{ iv!;i 

1S.U... iv.i:! 

lH.'.j... . \;.:\H 

la-io. . . . i,',.:w 

is;,7 . . l.V.'7 

lH,Jrt l.'i.nfi 

]>•:)<) i:..i'i 

ISliO 1 '>..".) 

Isijl IV.'ii 

ls(i.' i.».;!.< 

iMi;{ 1.J.S7 

isill 1.VH7 

ih(i.; ivn 

is(it> i;, i,i 

lb<>7 l.»..i7 

lS(iS 1 v.")!! 

iHiiSj 1 ■, i;(i 

1S70 l.)..W 

\>:\ i"...'.7 

IsTJ l."i.(i,i 

|s7:{ 1,>.!».' 

ls7t 1().17 

l!-T.> Ki.fiJ 

ls7<i 17 77 

1H77 17..'.' 

187H 17.!).' 

1879 18.H9 

IHHO.... Is (It 

1881 l-> .'1 

ISS.' IS.iJ 

lss:i 18.(i5 

1H8^... lM.(i3 

188,'. 1!).3!) 

188(i .'0.7;{ 

til. lititecl .'■■ittte.s Mint. 



•M('M;\- AM) JJANKiXc 

1 .SSM . 



I eji r. 

-M.l.i ls;i|. 
-'l.!)U I >!).-,. 



-':{.7J I 
-'(j.l9 1 



:{ 1 . 






Katio. ^car 

• '.i.'.-'ii'i i)i(i|. 

-'0 \nin. 

I't i'M>:>. 



. . 3+.()H 

. :i:>.7o 
. :io.,u 

\\;is, thertf 


< "f ratio to /6\-/.— The 

.11 th 

ore. oil ;i stiift silver I 
(i I 

monetai-v svsttu 

) diiriiio' I his nerio,!. 
'^\i^nld l,,,n ,.x-,.ort.,!. hoanK.I or ,l,\ertcd 

into the- arts. In is.'U. C 



I*-' e'cnditioM. irdiict'd tli 

•"•^■IVSS. Ml ;,,| attfiiipt I, 

) rtiii- 

1 roiii 24.7.) grains to 'J,'}. 22 

e wc'iulit ,,[■ ti 

If m 



rt'j)resciiti(I a ratio of api 

,S-'''";llllS (.r piHT n(,i,|. 'I'l 



1 rat 

niijit rat 

ncaily conrcl. j 
could I)a\c 

'o m \W.n was 1.3.T.'i to ], 

)f<'\iniat(ly K; to 1. Ti 

R' coni- 

'o iMitiJ I'ortv vcai-s lat 


io\\ ex CIV 

"oi- did it nacli iln 
^1 was pi'ohahK- af 

;is aii\- ari)iti 



Hfii settled ii|ioii 
^^('11. ill fact, ii 

aiy ratio wjiicl, 

■liiiiietallivnr' li„xv iii,.fr<ctii;d 

' a ^ul)S!(jiiciit chapter on 

estahlisli li 

y enaetiiKiit in 

;>n\- attempt must \)v \i 

value hetuccn t\\() sue! 

a siiinif coimtrv a rat 

lo o 

\\liieh ha\(' uni\-i-rsal titilit 

I (•on!m..ditiVs as o-,,|d and sil 


as o()l,| ^vas d 

i'i\eii out ol' (' 

too low, so after IH.'U sih 

•■""' a world market. Just 
"I'latioii wJKi, the rat 

lo was 

was too hii'Ii. 

^\as drum out l)cfanM' It 

"t was at the mint, and tl 

'ilvrr was worth n 

IO!-r ;|. 


llioii tl 


a i>'o 

Id iiasis. In IH.'M the rat 

If eoiiiitry soon JMiind its.lf 


1. hut the diil 

lo was eli;in^<(| to l.").!tS t 



'■••<"ee was so sJiM-|,t that it |,a,l little. .-f- 

70. Lc^ol t( //(/(/• ,,rl 


•v ('rtiit(\'J 

j la per .s/,7;/^/^/,v/___ 

'":'"'""" •""'"•'li-l.'n.dard,iiitllth,.|ro:.,| tender 

»<-ts of IHO-J is<;;j. The (jrst of ll 




"'iary. iSd-j. .mt) 



passed in 
"'ii/<(l tile issue ,,f .S|.-,o.o()(),,)(M) of 

anno- ( 'nited .Slat 

es Hole 


i:\()U rioN or I'lii: siandaud of vai.i'i: 

liciiri. T. These iidIcs were to he rteei' al)'e I'or all dues lo 
the (.overnnient and to he leyal tender I'or all dehls. 
|)iil)Iie and i)rivate, within the Tnited States. They 
were, Inrthei'niore, ixehan<^eahle I'or the (> ))er eent twen- 
ty-vear honds of the Tnited States at the option of the 


The first hill was followed six months later by a second 
measure authori/.in<^- si.j().()()().()()0 more notes, and in 
,)aiiuar\. ISC.:}, the total was inereased to .i<4()0.()()(),()00. 
'I'hus there was injected into the circulating- medium of 
the country s tOO.OOO.OOO of promissory notes, the early 
i'Klemi)tion of w Iiieh at least dei)en(led on the success of 
the Federal army in the field and the reestahlishment of 
]n'ace and ordei'. In accordance with (ireshani's Law, 
i^old entirelv disapi)eared from circulation after the first 
hill was passed, and pi'ices were soon expi-essed entirely 
ill t'^rms of the pai)er standard. The situation was 
liirther complicated in July, IHC.'J, hy the repeal of the 
|M(>\ision for Ihe exchann'c of the notes into United 
Stall's Itonds. and hefore the end of lH(i4 ^'old was 
(juoted at 280 in the \ew ^'ork market. In otlier 
\^o!-(ls. the "urccnhacks"" were \\<)rth hut .'}.) cents on the 
ddllar. It is ohvious that tlu' country was no lon^'cr on 
a u'old hasis. The unit of value was now the Ciovern- 
iM( nl's promise to ])ay Si in nold, a unit which fluctn- 
ated with the fortunes of war. 

71. Single i^oUJ sldudard after 1S7!). — This condition 
lasted louij- after the conclusion of the war, l)ut naturallx' 
as it hecame i\ ideiit that the nation was to endure and 
the ( io\crnment linancts impro\ed, the di\c'r<4-ence he- 
l\\((n u'old and tlu' ])a])ei' standard u'l-adually decreased 
nnlil it was completely destroyed when in .Ianuai-y. 1H7-K 
tlu treasury idlVrcd to redeem its le^al temler notes 
I!! !H7;j nn act \\:is piisscd wliich made oold the sole Ic- 


•MiiM;V AM) ll.WKiv,: 

„;„::,1 :;!:;.:;,: -'^ "«-' ^'y ^"'-'--i <'>■ «i.c. .■,.,<.„.,» 

Iri IK7K ll„. f,v,,s,„-y ,v„s m,ll,„ri,,.l I., ,,„rd,.sc. sil- 
■^ Mi.r,„.-,„ Wt .„ll,„™..,l ,iK, ,„„,|,„, „, ,iK,, I, 

" II' <>'„,,,.,,,„.,. Hl.,rt„r the. Silvc,. I>,„.tv(„c.rt 

.•■ I o.„ ,„„,..,.,,,, ,,,,„„, ,,,,.,„,,;,, 

-■ l:l'''l""".,«",,,,k.|cJ 

tli'^ iTM,„,|,t,„„ „f ,|,,eic ,,aynu„ts ,„ ,ht.>. 

n •• , • 'M; ,1(1 act was nnssf-r] on 

?'■"" ''V''''':'>' '-'•'■''•■'■ "-■•■■n.v tiK- r„i, si ' 

"-S t„ I,.. ,1, ,„,, |„,„,,,,,. ,1,^, ^,,., _|^_| >" t - 

-nM„.i, as .1,,. I.„„ls ,1,.. (:„v,,,M,H.nt ,„',,.„ t' ,„ , 
V,... a„.l «,.,.n,l,a,.|<. a. pa,- „iH, ,«„,,, „, |,av ,e, 

1 ■ .yiM.|i.,,H„ii,v..Uyp„,vi,i„r.,Mi„.i,.!..,i„,; ;^^^^ 

"--■"■I "»l"- ^ "P"., the. S«.vctarv ,,,■ ,|K. |,,av 
;,;•■ l-«^;i ^ «a, a ,1„„,„, ,.,„, „„,,, „,',«;' 

i:\oi.i rioN OF 'I'm: standaud or \ \i,n: (j; 

silver: Irom lH.*}t until 1H()2 it was o()|(|. Tlifn came 
the Icyal tender ;!ets, and yreenhacks heeanie the actual 
standard, to eontiniic until I87!>. In IST.'J ^old was 
made the siuf^le le,ual standard: and iVdin the resump- 
tion of specie payment in 1871) it has l)ccii the actual 
standard as well. 




If us 

*^ 4 

1 ^'^ 











7i. Defects of onld. The next function of money 
to he considcrrd is its use as a statidard of (IcftTird pay- 
ments. Obviously this dilfers from its futietion as'a 
standard of value only because it introduces tiie time 
I lement. 

For this |)ur])ose, also. <rold is a defective standard. 
l>ut it is hy far the best that is krunvn. c;,,!,! is ,hirable. 
Once mined, it is added to the pnxhictions of the |)ast. 
to remain always a part of the world's supi)ly. For 
tins reason the amount mined in any one \-ear cannot 
l>ear ]ar<.'e eiiouol, proportion to the total amount in 
'■xistcjice to cause <>reat changes in its \alue. K\en with 
tiie j)resent annual production of over .$4.)().()()(),()(H) 
the amount in existence is so iai-oc that its \alue is much 
more stable than anything- v]sv which could be used i'oi 
th(.' j)ur))ose. 

Although the same was formerly true of sii\er. it- 
pi'oducfion has sn nreatly increased during the last 
tlnrty years that a sinol,. sJUcr standai-d ol' deterred 
payments woidd be xcry unsatisfactory. lUtwccn IH7(i 
and IH'.tl- its ydld pne.' fell .*)() per edit. C'hanncs as 
xiohiit as this wduld nnt ha\« tak( n ;lare had not silver 
bet II dciiKuicli/cd in tli( I'nited Slati s and hail not the 
natmns ol' Kuiopc aKd diseardt.l it <Iuiiiih th,. l;,st h.-df 
crnlury. Tins ^nat chaniic in Ihf value (>{' si|\(r with 
res|)(c| to n(,|,| s( r\((l to discredit il as a standanl. 

i:....i.: :•. 

■•]'■-'• : .' 

• t w i i C 



double standard, but shall reserve that subjeet lor more 
{•arel'ul eoiisideratiou in a subse(juent chaj)ter. In the 
absenee of a better, we are therei'ore forced to the eon- 
elusion tliat gold is the best standard for deferred pay- 

7.5. Definition of deferred paijmoits. — Deferred pay- 
ments are usually the result of eontraets. When we 
stop to consider that contracts play a part in nearly all 
business transactions, the inij)ortance of the subject is 
a|)[)reciated. Our investments, bank deposits, notes, 
currency, in fact, a lar^e proportion oC our wealth con- 
sists oi' conti'acts. If economic prosj)erity is to con- 
titiue. these contracts must i)e enforced. To this end 
the Constitution of the Tnited States declares that "no 
state shall ])ass any law impairing the oblination of con- 

Althougli the ])rovision ])revents the direct impair- 
ment of contracts, the same end may be accomplished 
indirectly by unwise moiutary laws. Anything, in fact, 
that causes great changes in prices will alter the elfect 
of conti-acts. Practically all contracts are payable in 
tci'tns of dollar-, and some of them I'un for long pei'iods. 
In order to securt' jxrfect justice between debtors and 
creditoi's it is lucessary that the dollar should mean the 
s.iiue at the maturity as at the begininng of the con- 

Speaking accurately, this is impossible, for even wlicn 
tile contract is specifically made payable in gold, the 
purchasing powi r of that gold ;il'tei- ;i jxriod of Mars 
liiav liMxe ejiaiiged eo]\sider;d>lv. ('oiitra<'ts ])avable in 
gold, howcxcr. ba\e always Ixtm tln' most highlv re- 
g.'U'ded. beeauve no matter how distant the dale ol' ma- 
turity it is gen( raiiy Teil tiial tiie \alue ol golii will 
ap|)ro\intate its present \alu»'. 'l"he risk that it will be 

VII — 




greater or kss is only the ordinary business risk which 
every husiiiess man must take and for which he must 
make allowance in his calculations. 

A nrtat many contracts, however, are payable in terms 
of '•dollars," without s])ecifyino- the kind of doHar that 
is meant. While the statutes define a dollar as '2li.'2'> 
•grains of |)ure ^old. yet debts may be le<rally paid by 
other forms of dollars. The law makes certain forms 
of currency lenal tender in payment of debts. The sil- 
ver dollar and the treasury notes are lull le^al tender, 
(ireenbacks are full le^al tender. National bank notes 
are IcM-aJ tende:- in payment of any debt to a iiational 
batdv and are recei\ able by the (Government for all dues 
I xcept duties on imports. Subsidiary siher is le<4al ten- 
di']\ but for c(inv( iiicnce sake onlv for -Sjo in a siimle 

7<i. K//'cct of h-o-al tender lnrcs.~So lon^ as all the 
forms of currency are interchan<rcable and of the same 
value, leo-al tender laws have no particular si<rniHcance, 
but if some form ol" currency is depreciated it is obvious 
that no creditor will care to receive it and i very debtor 
will want to i)ay in that form of currency. For in- 
stance, wlnri the -rreenbacks depreciated to ;{.) cents on 
the dollar in ISC.l, they were still le^^al tender utdess 
oliierwise sjxcitied in the contract. Xo, dclitor would 
think of |)ayin^' his debt in o(,ld dollars because with 
.'{.') |)cr cent of that amount of ^old he could buy dc- 
prcciahd t>rcerd)acks that would I'ully satisfy the debt. 
77. ('(nisliiiilitiiKilif// of Lc^nl Tinder Aetn. -TIk 
rio-ht of the (ioxcrnment to pass the Le^al 'I'ctider Acts 
Mas in fact declared uriconstituti(;nal by the Supreme 
{'•Mirt because it violated the clause of the Constitution 
■-..iirii i;;rri,i.a Tii< iiii ji.i i iriiciii oj u\v vaJiditv ol con- 
tracts. 'I'his decision was reversed, however, bv a sub- 



sequent Siij)iriHe Court wliicli (kclarcd the statute con- 

stitutional under tlie autliorit 

I)rovi(le means for earrvino- on \\ 

y o-ivrn to Congress to 



•uvjn<4' the question of eonstitutionahtv of lefj-al ten- 

ler acts, it niay he well to consider Avheth 

er under anv 

he gained 

( ireunistanees tliere is any advantage to 
;i(l(hng the legal tender i'eature to the various forms of 
circulating media. Does the medium hecome more val- 
lia'nje l)ecause of the legal tender stamp ^ Ohviously, 
if a country adojjts the gold standard, making gold 
Irgal tender, it increases the value of gold somewhat 
iKcausc it increases the demand for it. J?ut this is hc- 
■•;!usc gold is iRcded as a medium of exchange. The 
legal tender feature adds nothing hecause it will circu- 
late at its actual metal value. AMicn a country attaches 
tlir legal tender stamj) to two metals we have already 
seen that the chea])er will drive out the dearer and that 
liie chtaper metal will also circulate at its metal value. 

In the case of the greenhacks the legal tender feature 
.i('led nothing to their circulating ])owc'r, as is shown l)y 
the fact that they iluctuated in value as the time of 
tli«'ir re(lemi)tion seemed early or remote. The legal 
tdider featuie, is, therei'ore, of value solely to the 
i!(l)tors, who can take advantage of laxity of their con- 
tracts to |)ay their dehts in (lei)reciated currency wlicn 
Miry should pay in the standard iik tal. It adds little, 
tlieret'ore. to the circulating power of the medium to 
which it is attached, and what little it does add reacts 
tn the a(l\antag<' of a single class. 

The whole jVn- silver agitation was an attempt to 
(liange the standard hecause it helieved that in re- 
ganl to its use as a standard of dilVrred na.vments u-old 
was deCertivc. It is a|)parent that it is to the advantage 
of the dehtor class to have a standard which is coii- 






stantly (lci)irciatiiin- in comparison with fr-oods; in other 
Words, that ^oods should be apparently rising in value. 
78. Debtor claa.s injured by an appreciating standard. 
—From IHOO to 18!)(> there was a large debtor class in 
the country composed of farmers who had gone AVest 
and purchased land on mortgage. These farmers 
l)ought the land agreeing to j)ay a certain price in the 
future and a certain rate of interest each year. This 
])rice and interest rate were based ujx)!! the value of 
crops, i)articularly wheat, which in the early 70's was 
worth as high as ^'1 per bushel. The i)rice of wheat 
gradually declined until in 1H1)4 it was worth less than 
.)() cents per l)ushel. The farmers found themselves 
unable to meet the interest payments, much less to pro- 
vide for tiie I)aying off of the principal. Tlvy were 
told that this condition was due to the appreciation in 
the value of gold following the demonetization of silver 
in IHT.'J. They were also told that if silver could be rc- 
nionetized, that is. made the standard of value alon<T with 
gold, that the (piantity of standartl money would l)e 
doubled, that the value of standard money wcndd be 
reduced one-half and the value of evervthinLr else 
doulded. This debtor class composed the backi)one of 
the Silver j)arty in \Wi\. Fortunatily before another 
election was held the (|uestiou been settled to the 
satisfaction of everybody by the unexpected increase in 
the production of gold. 




79. Price. — Tlure is a ilistinctioti between the use of 
the words "vahie" and "price" wliich it is well to under- 
stand clearly. A'alue is the expression of a ratio of 
importance between two commodities. If, for example, 
one wishes to express his estimate of the worth of a pair 
of shoes it is necessary tr) make a comparison with some 
other commodity. Thus the value of a pair of shoes 
may be expressed as e(iual to two hats, or the ratio ex- 
j)ressed is one to two. 

Price is a ratio expressing a comparison of value, but 
one of the terms of the ratio is money. The use of a 
standard of value which is familiar to everybody 
< iiormously simplifies the expression of values. In order 
that price may have a clear and definite meaning it is 
necessary that the money standard fluctuate as little as 
possible. If, however, there is a change in the value of 
the standard, it alters the real meaning of ( vcrv (pioted 

Tliut the prices of goods depend quite as imicli iijuiii tin- value 
lit' money as upon the value of ilie j^oods tlieinsolves, is a truth 
that the reader must fully ^ra>}). It may he a little pu/zlin^' at 
(Ir-t. for it is natural to think of monev as a Hxfd and stal)le 
lliirii!-. "ith respect to which o*l'er thin<Ts fhietuatc. To iii.inv 
men tiie idia that money ehan^is iu \alue is as novel when tir^t 
presented a-; the notion that the ocean chanj^es its level, '['he 

ison 1 

<<l i:ii^ Hi!--.! |ij)l I lieu>JlMI «HII ir^aio 111 lllr \alUe <ll 

noiiev lies in the fact that men th' '. of priir us hein^- identical 




:\I()NEY AM) B \XKL\G 

«itli \aiiu'. and miicc Hit ■priru"" of <^o\d ( aiid of silver in a 
ciiuiifrv win re it is irecly cuinnl into iin)iK\- ) ncwr ciiani'cs, it 
i> asMinicd that tlu value nf ^old i> uiichaii>4ini;'. 'I'iie eoiiinioii 
l)elief in tlie stability of nioiiev i^ anali)0()u> to the illii>i()ii e\i>t- 
in<^- anion..' primitive people uith ivnard to the Milar sv>teni. 
Tliev think the earth is >tationar\'. It is their view point, and 
all I'hann-o (n, the >ereen of the tiriiiaineiit m.ih to th. m to reflect 
ehaiiu'cs in the heavens, not in the petition of the earth. 'J'he 
analo^'V, like all analogies, i> imperfect, hut it is su<<-gestive. 
'I'lie fact that chan<^es in ])rice reflect chan<res in the value of 
nioiiev as well as chan<4is in the values of uoods is very ini- 

Every mail of business who l)uys imd sells property 
lias a deep interest in the iluetuation of prices. M(;,t 
of them arc thorouohly familiar ivith the causes wliich 
produce fluctuations so far as they are caused by in- 
fluences atfectino- commodities. Only those who have 
made a special study of the subject comprehend the 
influence of the fluctuations (.f prices on the conditions 
affecting' the momy side of Ihi' ratio. 

80. Prices ihpiinl iijnni tJic inoiicii inarl-ci. A lon< 
continued and steady rise of prices may take |)lace in 
the face of conditions of su|)[)ly and demand for com- 
modities which would seem to warrant (|uite the opi)osit(> 
tendency. ( )n the other hand there mav be a very oivat 
fall of pru'cs notwillistandiui.' the fact tliat conditions 
of supply and demand for commodities iustilV hi«dier 
pricis. The explanation of this must be soiioht for in 
the money market. 

The \ :due of mnn.y as o^ everythiiio- vhc is the result 
of an e(|uilil)riuui between su!)i)Iy and demand. How 
these forces j)roduce the result so far as ^dods are eon- 


cerncd we haxc ali-ia(l\- 

seen III 

eiia|)t(r on \;ilue. 


Mi.iicv ,inil ( 



The value of iiionev is determined in tiie same way, but 
the eonditions of supply and demand are so complex as 
to re(|uire a special study of tiiem. 

HI. VtUltii of moncij. — Money is utility in the form 
ol' immediate universal acceptal)ility. Its utihty lies in 
its exchan<4eabiHty in the same manner that nutrition is 
tlie basis of the utility of food. Money is demanded 
hecause of the need felt by men for this particular kind 
of utihty. Tlie name ^vllieh Me fj^ive to this conscious 
need of men for anythin<r is "desire." The failure to 
(hstinguisli between desire and demand has been a fer- 
tile source of error in economic thouti,ht. Some of the 
most eminent of earlier economists, observing that the 
desire for money was universal among men, concluded 
that therefore the demand for money was unlimited. 
If that were the case it would be a])S(^lutely impossible 
to analyze the forces determining the value of money. 
It would be the same as the attem])t to find tiie point of 
equilibrium which would be the result of several phys- 
ical forces if one of these forces was intinite. 

82. Distinction J)ft:ccrn desire (u>'J demand. — De- 
mand as used in an economic sense is "'desire" backed 
u]) by the willingness to sacriticc or give up something 
in exchange. The oidy method we have oi' measuring 
demand is by thi' amount of \ahie which will be sacri- 
ficed in order to obtain the object oi' the demand. The 
demand for money can be measured oidy by the amount 
of other valuable j)roperty which will ])e given in ex- 
change for it. 

l/ndcr the foregoing definition the demand for 
moncv is limited, detinite. and lial)lc to fluctuate from 

f,. \\ 

If .. mill i.n'.i-c SJ'IOM i',,1. .. l,,>v 


('\ ident that bis desii'c for the horse is greater than his 
desire for $.*J()(). The seller of the horse would desire 




tlic in..,RT more than the horse. The ,,.ie.stio„ of the 
(leiiiaiKl |„r money !iiay he reduced to this: Why do 
people desire moneys 

^ 8.'J. Thnr varulirs „f mi,„c,i.~ \n the first phice it 
IS necessary to (h-stinnuish heturen .h'tferent varieties 
"<■ money. There are three kinds of ,nonev: stan.hird 
money, fiat money, and crecht money. T|,e demand for 
these (hfferent varieiies is not uniform and under 
various cn-cumstances shifts from one to the other. 

Staiuhu-d money or commodity monev is some ma- 
terial which because of its proprietary (lualifications has 
heen a.lopte.l hy any particular oroup of people as a 
common medium of exchanoe, as explained in the ],re- 
(vdmo- ciiapter on the Evolution of .Money. Its supply 
IS reoiilated automatically, heinu- dependent on the cost 
I'l |)roduction. 

Fiat money is the medium „f exchanoe. tlie value of 
>vhich has IK. relation to the w(,rth of the material com- 
P"sm- it. Its value is derived from its utility as -i 
medium of exchanoe. Its supply is reouhited artifi- 
cially hy leoislative enactment. 

Credit money is simply a promise to pay the money 
which is m such form that it can he used as a medium 
nl exchanoe. \ promise to pay money hy some re- 
si.ons.hh- party m .y he just as valuable or'even more 
valuable than the money itself if it serves the purpose 
of money. 

_ «^. I'lat V. credit //,o//r//._Tlie distinction between 
<'^'t and credit money is an excee.iino-ly difficult one to 
make u. practice. In practically every <-ase of Mat 
""•"(■y. there is a promise eitlur expressed or implied 
to- pay the amount in standard monev at son.e Ir.d^.finlt^. 
tin.c: If not a promise- at least an "expectation or'ac- 
ecptanee o| th<- money in payment of taxes and other 




Slims due the ^overnnieiit issuing it. It would he (htH- 
ciiit indeed to imagine tint money whieli the government 
itself wouhl not aeeept in payment or whieh it never 


ted t 

o redeem 


S5. Demand for moiic// anali/rxd. — Tlie demand 

ir monev nuiv he studied hv analvzlntr the various 

torms () 

f d 

esire for monev. 

1. People desire money for the purpose of exchang- 
ing it for other commodities within a short time. 

'2. l^eople desire money that they may have a store 
iif \alue which for the time heing is preferahle to goods 
which have a (1; (lini't utility, '. e., those affording 
satisfaction hy tlieir use, or ('2) indirect utility, i. e., the 
use of which jjroduces more value, as in the case of all 
cnpital gootls. In some I'are instances the money is 
esteemed for itself alone without reference to its ex- 
changeahility, as in the case of a misers hoard. 

a. People desire money as a reserve liasis for credit. 

These three classifications cover all the desires for 
money and changes in the intensity of these desires have 
a their effect on the Aalue of money. 

HO. liapiditji of circniation.- — The extent of the de- 
sire for mon'n' for the ])urpose of exchanging it for 
goods within a short time determines the rapidity of 
circulation. The measure of the rapidity of circula- 
tion of money is the form of exchanges, which is de- 
Ijcndent upon four factors; 1. The numher of popu- 
lation. 2. The production and distrihution of wealtli 
uw capita, 'i. The extent to which division of lahor 
nr speciali/ation of employment prevails. -4. The ex- 

tent of the integration of industry 

wr //' //', 

./ /./' 




1111 fl'L." il<'lf1/l* <>i1t1>ll 

louhling the poj)ulation would douhle the demand for a 

I'lrcuiatina' medium 

Thei'c woidd he t 

wice as ma 


, '^!* 



producers and twice as many consumers. Tlicrel'ore it 
would re(iuire just twice as niucJi money to circulate 
the goods re(iuired for their consumi)tion. ' In a country 
of increasinu' l)o|)iilati.)n. thererorc. there must he an in'- 
crease in the (piantity u\' mone_\ . Otherwise the in- 
creased demand upon the supply will t,.|„j to raise the 
value or money. I)rinniiiu> witji it fallino' prices. 

Kven with a stationary population, advancing- civiliza- 
tion inevitahly hrings an increase in the production and 
consumption of Mcaith. the circulation of which i)uts a 
greatei- demand upon monev. 

88. Kll'cct of (Vnis'ion of /a/;or.— Alono- ^vith the in- 
creased production of oo,„]s per capita comes the in- 
creasino- division of lahor. In fact, the greater special- 
ization of employment is one of the most potent causes 
of increase of wealth. In primitive communities wliere 
the producer consumes a large ])art of his pn,(luct there 
is little demand for money, not at all in projxM-tion to 
the productivity of each man. Whenever men hegin to 
conHne themselves to fewer occupations, especiaUy if 
at the same time the variety (.f their wants increases, 
they are under the necessity of ohtaining their supplies 
hy means of exchange, and this exchange re(iuires a 
medium. Hence it is that division of lahor reciuires 
an increase in the supply of money out of projKH-tion to 
the increase ol" ])r<)(luct per ca[)ita. 

()pi)osed to this tendency and lessening somewhat the 
(k-mand for money is the integration of industry. 
AN'hen a numher of individuals or corjKJrations engaged 
in the various i)rocesses of the manufacture of Ti line 
oi" goods comhine so that the several i)r()cesses are con- 
ducted imder one ownershij). the neeessity for a larue 
numher of exchanges is eliminated. It may even go 
so far that no exchange takes place after the r.iw nm- 

SUri'LV AND I)i:.MANi) 




ttiials :UT i)urchasc(l until tlic tinislKcl i)ro(liict is sold 
to the c'onsuincr. 

H9. Special (hinand for i^old. — Uiuler prcst-it condi- 
lidiis in this coiiiitrv all tlu' f'oi'nis of money in ciivuia- 
tinn |)(.'rr<)i-in llu- rnnction of cxcluin^in^ ^^oods (-'(luaily 
\\(li. with possibly a slight ad\anta<4V on the j)art 
ol' j)aj)cr credit money on the score of convenience. 
Ill our trade with forei<>'n countries, however, if there 
is a balance of imports over ex[)orts one way or the 
other wliieh must he settled with money, there is only one 
i'nrm which will serve the ])nrp()se, i. e., ^old. Increase 
of demand from this sonree, may under some circum- 
stances tend to enhance the value of ^old, inde{)endently 
of the value of the other forms. This phenomenon ap- 
])ears in the form of a preUiium on gold, of which we 
shall speak later. 

!)(). Pai/mcnt of contracts. — Anotlier demand for 
money is in the ])ayment of contracts. T/nless there 
is a dis})arity in the value of the different forms of 
money the demand for money to liciuidatc contracts is 
likely to fall on all etiually. Sometimes the demand 
for mone}' for this purpose is artificially interfered witii 
by the (iovernment, as in the case of le^al tender laws 
which force the creditor against his interest and inclina- 
tion to acce])t certain forms of money such as the green- 
backs. The tendency in such a case as this is to shii't 
the demand from gold to credit money, and thus to 
eliminate the disparity. 

91. Store of value. — The demand for money as a 
st(<re of value without the intention of exchanging it 
for goods within a short time de])ends largely ujxjn the 
habits; of the ueoijle and the stabilitv of the (rovern- 
iiient. Money as a store of \alue is at a disadvantage 
when compared with produelixe pro[)erty. and under 




■ <'■ 

iK.riJial conditions priuknt people will regard stores of 
money as very unproiitahle investments. 

92. ItiMcirilfi of propcr'/f and contrach:—Umkr \ 
certain conditions. Jiouever, it may he advantageous to 
I'old property m the form of money. In countries such 
as Turkey, where tlie is unalile to protect 
property and where it is hahle to heas v taxes or even 
to confiscation, the j.rotit derived from the investment 
of money m pro.hictive enterprises, althougl, very great, 
niav he so risky and uncertain as to he unattractiVc. In 
such a country those citizens who a-e least protected hy 
the government are inclined to safeguard their future 
welfare hy hiding away their wealth in the form of 
nioney. The satisfaction thex derive from the con- 
sciousness of heing protected in their old age and hein. 
ivhevcl from the fear of Ims. .f pn,p.,rtv More than 
compensates them for the loss u, even a large income. 
According to the extent to which property is protected 
and contracts are enforced, as well as the amount of in- 
come that can he derived fn,m Investments, will the 
people of any country he disinclined to hoard accumula- 
tions ()( nioruv. 

J>.*i. -V/^< ,7V// (fnnanil for m,>tuf/ as a sloir of value— 
In every country, however. „<. mailer how stahle the 
^•""<l't""is. there aiv limes when iii,.„ev is m„re hi-dilv 
esteemed than any ..Iher Inrm of pn.pcrtv. \Vheli 
«l'<''e is a prosp.el of falling prices of comm.ulitics it is 
.•idvanfageous t„ ex,.hange property for m..nev hecausc 
'''•■;•''"'•' '"' "lon-y rises in exact proportion as com- 
"••><l'«"^ I'.'-ll. At the end. .f periods of prosprritvwh.n 
("•"•'■^••l .-'11 property Ium<. he,„ iuHatc.l and tju're is a 
'"'"''"■•;* *'''•'• <l"<'>ilm, nation of Ij,. j.oom is approaeh- 
-■■ = ■• -■-■■• .i.;.ii;s i> i,K, i\ (o he |)er('ei\ cd siid- 
''"• ''>•■' '•"■.^' ">iniher(,f peopi,, ns ho at onee heeome 

in I 


< ( 

eager to cxflumge their propcrtv into cash; the desire 
dt' a hirge lunnber to sell id the same time of course 
hiiiigs a siulcleii fall in prices whieji we call a [)aiiic. 

'{'he converse of this takes place at the Iieginning of 
;i lioom period, when people realize that pi'ices are too 
Inw and that purchases Avill yield large speculative 
|)i()Hts. There is a rush to i)uy, that is to say, a desire 
to convert money which is about to i'all in value into 
I'orms oi' i)roj)erty which will increase in value. 

'I'lie desire to convert proj)erty into money is only one 
111' the causes and symi)toms of a panic. In a later 
iha|)ter on credits a fuller discussion of this will he 
uiven. The liciuidation of credits, either forced or vol- 
imtai'v. at the beginning of a ])anic accounts for a large 
pii't of the sudden demand for money and is the prox- 
imate cause for the liciuidation of j)ropfc,'rt\'. 

!>t. IltHirdhii^. — When the storing away of money 
liecomes excessive we call it hoarding. It would be ex- 
(ccdingly ditTicult to attempt to draw the line Mhere 
hoarding begins. 'I'he amount of money which prudent 
people will have ready for necessary purchases and the 
payment of debts will vary widely under different cir- 
cumstances. In the panic of 1!)()7 the country l)anl\s 
.ill over the country withdrew their deposits from the 
New ^'orl< banks in order to be amply protected in case 
iif large sudden demands from theii- dejxisitors, A 
ureat many banks cairied this practice to an urueasof- 
ablc extent and filUd their \aults with money for whii'h 
Miey jiad no use and for which thei'e was likeK' to l)e no 
lisi- cxci'pt in the case of most e\t raordinai'v disaster. 
S"icli storing awav of money might propei-ly be called 

0.). i'hci'i 


(if i/diiniitijf. Steady jtrogress lu tiie 


tiiiii of improving the linaneial atid lianking sys- 




terns and the widespread e.lneation nl' the people in the 
advantages of deahn^ with banks lias chniinished hoanl- 
in«- m this ecnuitry nntil iwider nonnal con(htions in the 
prese,^ era it is praetieally hnntecl to persor.s in rural 
(I'striets and to a tew eeeentrie in,lividuals wh.. are will- 
H.J( to rnn the risk of rohhery in order to enjov the 
•snt.siaet.on of an oeeasional view of a pile of' v'elhnv 
coins or ol u;yfL'u paper. 

li is extremely easy, however, to frighten people out 
«>1 then- hanku.o- |,ah,ts and eause them to revert to the 

more primitive methods, 'i'he f-iihir.' ..f .. . . • 

I , ,, ^ "^ i.uiuie ot a prominent 

;ank or the exposure of improper methods in hiVh 
^jnanee u ,11 u.duc.e a o,,,at many timid persons to wit^i- 
«t'-aw their deposits fn.m l)anks and stow awav the 

|H<uuy m safety deposit vaults or in s,,me hidin^'plac-c 
ill their lioiiKs. ^ '■ 

00. liauh ,,rr.v m>f hoards.^^Thv enormous sums 

"' money stoivd in the vaults of hanking institutions are 
;;;' '"•*"';'"^, "■ ^'"' -"- *" -'•■■*•'' -<■ a,., usi,... the term, 
llicse dollars are really supporting- the .-mlit of the 

'-"..try wln.h as a suhstitute is <loino- the real money 
->rL In laet. a dollar ma hank reserve haekiuK up 
c-ml.t .s really d,,in^ four or five tiiues as n.ueh work ;/s 
its brother meireulation. The full explanation of this 
point IS deferred to the on e,vdit. 

07. anrn-nnuni hoan/iu^: While the oreat sums r,f 

;•""->•'" '••••"k .•-.rves are not hoanls unless thev should 
•;■ .x^vssive. their aiv at times hu^v amount,; in the 

...vm.n.rni treasury and suh-treasuries whieh are reallv 
,'"';',• "'•' '^'" '"I'.i.'s that $i:,(M)()(,.,„„) i„ .,,,1,1 
^l.'.il hr maintaine.l {„ ,|,, ,,,,,,„,^. ^.^ reserve a-, dnst 


^reenhaeks outstandiiin-. 

■serve and not a| all a ho;.-! 


ver, both coin and i 

I'his sum is a true r(>- 
, ...1 1. . . . . 
iKM , , liic yoi(i and 

•""'"". "liiHi are held in ti, 




[1 the 
) the 
'lira I 







I ins 












treasuries and af^aiiist which ^ohl and silver certiticatcs 
are circulatiu<>- are not hoards, Tlie pa[)er money which 
represents them is doing the work hy proxy. Unhke 
the hank reserve, however, which through its suhstitutes 
does four or five times the amount of money work, the 
uohl and silver certificates do no more than gold and 
silver itself could have done. The only advantage de- 
rived from the system is the greater convenience and 
llie saving of the wtar and tear on the metal. 

Another part of the money held hy the (iovernment 
represents a store of cash ready for future expenditures. 
This is the sum necessary to he kept on hand in order 
to provide for ])urchases within a short time, just as 
individuals find it necessary to keep a certain amount of 
(■;ish on hand for the same purpose. 

.Vnv amount of money held in the treasury heyond tlie 
sums mentioned ahove is a hoard, ir'i)resenting jnirchas- 
iiig power which is withheld from cii'culation and for 
the time hcing ahsolutely useless. 

1)8. Disiriinitidfioii in demand for tnaiici/. — The dif- 
tVrent forms of demand for money which we have out- 
lined ahove do not apply at all times eijually to all the 
ililferent varieties of money. There arc sometimes cir- 
cumstances when llu' (kiiiand falls ui)on one kind alone. 
So long as all the different forms are kept at parity the 
ilemaiid for a circulating medium to exchange goods or 
to li(piidate debts is satisfied with either form. 'I'heti 
soiiulimes the <piestion of convenience j)lays a jiart, as in 
tl'.' case of the siUer dollai" after the sihii- ])urchases in 
the HOs. 'I'hr^e silvrr {lolhirs did not circulate in 
the (piaiitities desirid hecause the ptcple had learned 
to prefer paper on the score of eon\ ( iiienee. 'I'hcy 
would n fust to tak( tin ni iroin tjie iianivs and would 



,il Ihem I'reeK ; the h.iiik-- would turn them hack 




* TtFT rt 

into tlie CiovciiiiDcnt tRasury ii) cxdianoc for paper 
which their (Icpositors (Iciuaiuled. The (ioreriinient 
even went so far as to pay express charges to dis- 
tant points in order to keep the silver dollars in circula- 
tion. Finally the ingenious i)lan was hit upon of stor- 
uio- away the silver dollars and issuinn- ;„ their stead 
silver certificates of out- and two dollar denominations, 
which were circulated in their place. 

0!). f^cm^nnal dcmaud for fnoiin/.-Y or 00 i)er cent or 
more oi' the d(Miiestic exchanges no money is recjuired at 
all, hank credit in the form of checks and' drafts serving 
the purpose. This relieves the money of the country 
or most of the demand hut there are circumstances wheii 
this hank credit fails to do its work. During the crop 
moving season in the South and West there is a demand 
lor a medium of exchange which cannot he supplied hy 
hank credit. Kvery autumn there is likely to he a de- 
mand for ahout S1.-,().()(M).()()() „f extra moiley to finance 
the crop moving. This sum must ordinarily come out 
of the reserves of the hanks, causing a contraction of after <redit has heen exi.ande.l, and giving rise 
to dangerous stringency in tlu financial centers. This 
special seasonal demand for cash and the monetary proh- 
IfiHs which it occasions will he the suhject of special dis- 
cussion later in this \olnmc. 

100. Demand fnr monc// in infrrnnfinnal trade. - 
'ri'c exchanging of ,n-,,n,l,s hefw<rn this cMnifry and 
•••'"•"•"I iv.|uires the use „f |,„t a minimum of u'loney 
only th. differences hetween the exoorls and imports 
•"■'■ n-.|uired to !„■ settl<d in ,.asl,. The „nlv possihle 
'■'"■'n "I' uion,y uhiel, can he ns, ,| in making 'this inter- 
national settlement ,.f I mde halanees is gold. Some- 
times t;u- ilinirrnr, iKlucti ilie imports ;iii,i exports 
IS so ureal, or th. re has heen so much international hor- 




lowin'i' that the resultiiio- nioveiiK'nt of gold in or out of 
the eountrv is a (juestiod of extreme iinportanee because 
of the effect it lias u])ou hatik or (Government reserves 
;iii(l the maintenance of credit. Jt is this demand for 
i;<)ld to he used in makin^^ f()rei<4'n settlements that ac- 
counts for the appearance of a premium on ^old under 
tcrtain circumstances. Whenever foreign hanks tind 
that they cannot exchange other forms of money for 
uojd they are driven to procure it wherever they can by 
olfti-ino- a j)remium for it. 

101. Premium on ^'o/^Z.— Kx|)erience lias shown that 
ihe appearance of a small j)remiuni on n()]d is attended 
hy such serious disturbances in the credit situation of the 
country that such an event is to be avoided if possible. 
The seriousness of this matter led President Cleveland 
ill ]S!)1- to |)iit out issues of bonds and later to deal 
with a syndicate of \t\v ^'ork banks in order to jire- 
\cnt a premium on gold, or in other words to maintain 
;i i)arily among all forms of money in the Cnited States. 
'I'he l*resi(Kiit did this in the lace of |)opiilar disap- 
pro\al by the mass el' citi/.i'iis who did not j)ercei\e the 
necessity for these actions. 

All rorm>« of money (except national bank notes ,n 
national banks tbciiisth cs i ser\c the purpose of bank 
reserxcs e(|ually well, although gold is |>rcfci'ab|c be- 
cause it assists the (Jo\ermiient ii: siippoi-tiug tlu' cir- 
culating credit. It has been j)ro[)osed in recent currency 
hills to compel the banks to m;iintaii; their reserves in 
-old in order that tlu re shall always be a satisfactory 
hasi*^ for the ci'cdit of the country. 

102. Viiviilii'nili, of IIk (l('m(iii(! for moucij. 'I'iic 
'!( iiiand for luomv is a xcry uncertain (piantitw The 

iiiict rtaint les o 


s suhstitutc. credit, mav cause \erv sud 

lien and \(.ry great changes in the diniand for nioi 


\ II- 




\ ' 

Tlie growth of population iiiLTcascs spt'cialization of em- 
ployment and tile increasing volume of industry per 
caj)ita causes an increasing demand for a medium of 
excliange. On the other hand, however, the perfection 
of the credit machinery and the extension of hanking 
facilities economize the use of money and lessen the de- 
mand. The suddemiess with which any derangement of 
the financial machinery will cause a shift of dcrnand 
from one form of money to another is one of the com- 
l)lexities of the subject. 

1 ().'{. SuppJii of moucij. — In contrast with the insta- 
bility of the demand for money the supply of money is 
so stable as to give rise to the problem of "clastic cur- 
rency." 'I'hc only ^ariable clement in the supply is 
found in cridit, which is a substitute for mojiey and 
does the same kind of service. 

10 k Vfiriftiis of Ignited iSidfcs rtwiic//. — In the 
TJnited States at the preseiit time there is in circulation, 
first, the Knited States notes or greenl)acks. The suj)- 
ply of this form of money is absolutely unchanging, 
amounting to .$3 MJ.OOO.OOO. 

Second, the gold and silver certificates, representing 
actual metal de|)osited in the trcasin'ics. The sup{)ly of 
these certificates varies with the amount of gold and 
silver dej)osited in Washington and the increase or de- 
crease in theii- amount is offset by a corresi)ondiniflv 
opposite change in the supj)ly of metal money. 

Thii'd, National bank notes are somewhat elastic, but 
are so limited by the amount of bonds which banks can 
ac'.iuire to deposit as security i'or Iheni that the supplv 
does not (•li;uigc in rcsponsi- to the demand. 

I'oiirtli. The supply of silver eoinag.' in the couiitry 
is rcgiilalrd I'v arliitrai-y action of Ijie Government. 




Outside the siihsidiarv coinaf^c its use is so limited that 
it cannot he re^nirded as an ehistic elejii'.nt. 

L'ifth, (iold is tlie (Jiily n^ally thistie elenieut in our 
country at the present time. Tlie amount in the country 
for monetary purposes at any time is influenced hy ouV 
financial and trade relations with forei^^-n countries. In 
tlie chapter on foreiii'ii exchanges the causes of increase 
)r decrease in the (luantity of o^old in the country is 
, \l)lained in all its details. 

10.). Stipplji of ^'•o/</.--The (|uantity of oold actually 
(•roduced in the country has very little effect upon the 
Mipply in that country, (lold is so easily transjjorted 
that it eiiually distrihiites itself throu^Iionl the world, 
^cckinn' those countries where its value is i^i't atest. The 
listrihution of oold may well he illustrated hy comjjar- 
'ii<>' it with water |)oured into one of a series of vessels 
•oimected hy pipes. U^ater jjoured ii:to one vessel dis- 
irihutes itself throuiih all the connected series so that 
.)ne level is maintained throu^diout the whole. If the 
pipes ar'' small or cloi^'^red up tliere may he considerahle 
delay in the (listrihution of the water. In the case of 
H'old there may he for short i)erio<ls of time inecjualities 
in the (listrihution of u<)I,i which are to he accounted for 
iiy distnrhances in the machimry of exchange; ulti- 
mately, however, "^old will find its level throughout the 

I()(). Factors In the snp/iIi/ of <r()J<J.--Thv snj)i)ly of 
uuld is determined hy tlie same factors which determine 
llie price of any other commodity. There is ahvavs a 
tendency for the supply to he incr(.ased so j()n«^ as there 
IS a profit in its production. If the cost of {jrodueitiL,"- 
iioUl is considcrahly helow its v;due there will he ;i strn»!.<«' 
inducement to enlarge the operation of mines and to 





prospect ior new mines. However, as the quantity of 
gold in circulation increases, the effect will be to raise 
prices, as shall presently he explained. This rise of 
prices, affecting as it does all the implements and ma- 
terials used in mining as well as the wages of the miners, 
increases the cost of production and thus diminishes the 
margin of profit made in the production and the value 
of gold until all the profit of mining may disappear in 
the mines wjiich have the highest cost of production, 
causing them to shut down and cease contributing to the 
su];ply. In this way the production of gold is auto- 
matically regulated. 

107. PccuUariiii of the .siippi// of ^oW.— There is a 
peculiarity in connection with the sui)ply of gold which 
distinguishes it from any other commoility. The sup- 
ply of a commodity may be considered as a sum of util- 
ities Avhich satisfy human want. The suj)ply of wheat 
Avhen analyzed means the number of units, each of which 
has a certain ])ower to satisfy hunger. Two bushels 
of wheat have twice as much power in this respect as 

In the case of gold, however, the utility consists of 
its poMcr to exchange other commodities.' Now there 
is no reason at all why <mv grain of nutal might not do 
.just as much w()ri< of exchanging commodities as one 
o'lnce. If the (juantity of o„ld i„ the world is doubled 
at the same time that the prices of goods in general are 
doubled. th(> increased (piantity of gold will do no more 
money work than the original amount, and the money 
supj)ly of the world has n..t been increased at all when 
measured by its c Ifectix eness. 

lOH. Ilisfurical /////.s//7///V,./,',v. -Then bav<- I,. ...i three 
periods in history whid, illustrate this nv.ural j»roposi- 
tion very clearly. The -r. at increase in the amount of 




sihtr ill the world ut'tcr tlie iliscovery of xViiicricu and 
the opening up of South iVnuricaa and Mexican silver 
mines by the Spaniards in the sixteenth century caused 
;i tremendous change of prices for e\ ery commodity. 

The discovery of gold in California and i\ustralia in 
the middle of the nineteenth century was followed by a 
similar rise in general prices. At the present time we 
are undergoing a ])eriod of increased gold production, 
(Specially in South ^Vfrica, and accompanying hi/I'll 

In each ol' these periods the great enlargement of the 
stock of standard money in the world produced a pro- 
found social effect and radically altered the relations 
Iittween dei)tors and creditors. The small (piantity of 
money metal in existence before these discoveries were 
made would to-day do just as much work if there had 
lieen no increase, but the le\el of prices would be very 
low indtfd. The value of the dollar might easilv have 
Invn ten times what it is to-day and 'J.i cents might have 
been a fair (' 'v's wage for the unskilled workingman. 

This ridiculously low level of prices, however, would 
ti(»t mean anything at all if all \ alius were in the same 
proportion. If the necessities of life cost one-tenth of 
(he price which \\e are paying to-day, 2.") cents per day 
u ages would be as satisfactory to the laborer as $2.50 is 
under present conditions. 

109. Ti'tnporari/ n'siilts of cliatiiic of monci/ sitppl//. 
While it makes little difference whether the absolute 
[)rice level is high or low so long as relative values are 
iinchanged, yet changes in the price level are likely to 
have great economic results because the ])rice of every 
( oiiinioclitv that is boUi2ht and sold, docs rwtt chanue 
' (lually or sinniltaneously. Therel'ore a change in the 
general price level is likely to cause a general change in 








the relative values. Kspeeially is this true of credits. 
Jf a (Irhtor lla^ i)r()iiiise(l to pay a creditor ,$100 in ten 
years, and il' within that i)eriod prices have chan<red so 
that the SI 00 at maturity rej)resents the eciuivalent of 
oidy liaif the (juantity of ^oods, the creditor has in real- 
ity received only half as nnich in value as he loaned. 
The fact that he received the same numher of dollars 
does not mean anythino- lu-cause the dollars to him are 
valuable oidy as he can cxchanL-e them for things that 
he wants. 

^ ^ 110. Effcvl of increased sup pi// of ^oJd traced oiit.-- 
The ])riiiciples which have heen stated above will be 
better understood if we examine the eft'ect of the addi- 
tion of a certain (juantity of ..„1,1 to the stock already 
oil hand. Let us follow the output of a mine and trace 
out the ultimate effects of the new gold. 

When the gold has been refined and made into bricks 
it is sent to a (iovernnient assay ofKce, where it is tested 
to determine its purity, and "then turned over to the 
mint. Theoretically, under a system based on the free 
coinage of gold anybody can take the metal to the mint 
with the projyer amount of alloy needed to harden it for 
purposes of circulation and can have it transformed into 
coins. Practically, however, the gold bricks are taken 
to the mint, but instead of waiting until the gold has 
been made into coins the owner receives at once tlie 
money e(juivalent for its value. The person who 
brought the gold to the mint now has the coins or their 
e(|uivalent in some other form. lie will either spend 
this money or deposit it in a bank. If he goes into the 
market to luirchase goods o|' any sort his buying will 
have the effect of bidding iij) pi-icfs proportionately 
and the gold which was mined will be responsible for 
wliate\er ef}. ct has bem jjrodnced on prices. The mcr- 



(liant who received the money uses it to replenish his 
>t()ek and his huyin<r will tend to raise the prices of his 

As tile money eircuhites from hand to hand, at every 
(•\('hanu,e it will tend to raise ])rices. This continuous 
})n)cess of piiee raisin<4,-, s))readin^ thr()u<;h all the dif- 
lerent markets, would seem to have no end. It would 
seem that if we took one dollar and ^ave it time and 
rapidity of circulation enough it might raise the general 
price level to any height. 

111. Limit to tlic price-raising effect of gold. — This 
rediictio ad ahsurdum is answered hy another pro|)osi- 
tion which counteracts it. Every rise of price reduces 
the ])urchasing value of the dollar, so that as the dollar 
continues to circulate it lose its power to exchange goods 
ill the 2xact proportion as they have risen, so that if we 
conceive prices to have exactly 'ed it will recjuire 
S'J.OO to exchang'' them where it ( y required one be- 
fore. The result will be that there will be an ecpiilib- 
rium of prices established at a higher level than before 
tile inci-ease in the (juantity of money. 

If the quantity of money should be diminished in 
.iinount, or if the (piantitv of goods to be exchanged 
should be doubled, there would be a lowering of prices 
to correspond on account of the increase in the offei-ing 
of goods for sale without the corresponding amount of 
bidding from the owners of cash to jiay for them. The 
result would be the formation of a new level of ])rices 
at a point where the offerings of goods and the bidding 
of the holders of cash would balance. 

112. Alternative nfies of nexc gohJ. W the miner 
who has increased the moiuy supply of the country with 
the product of his mine should choose to hold the gold 
coins or the pa})er money ecjuivalent for the gold, there 




w-.iil.l he no cllVct wlmtcN.r ..n prices, jind it woiihl l,e 
as tlioiinh In. |,;i,| s|,„V(l away \\w n(,hl WwU or had 
ntxcr piodiicvd the yohl at all. 

However, if he deposits it in the hank its effect there 
will l)e to increase the loaniiv power of the l)ank and 
thereby to i.'icrease the piirchasiiii.- power of the bor- 
rowers of the l)anh and thus afi'ect prices even more. 
11.*}. Widcspraul cll'cct of ncxc ^o/r/.- An increase 
oi' prices on account vA' any laroe addition to the money 
supply would have more than local effect. AVe have 
seen how purchases from the retail dealers would 
tend to increase wholesale prices in the central markets 
on acco.nit of the a(l.,itional purchases of the retailer 
to replenish his stock. In the same way the iniluence 
would extend from the central markets io the producing' 
centers in this country and abroad. The demand for 
imported no„d.s \vould be increased and mdess our ex- 
I)()rts happened to increase at the same time the result 
would be an export of u„ld to foreinn countries. If 
the .general price level was raised in this country there 
would be an increased profit in im|)ortinu. ooods', and a 
correspondino- decrease of profit in expoH.i„n- them, un- 
til, if the oohl production or other increase in the supply 
(if money was ^-reat enouoh, there mi<.ht be no exports 
at all and we minht be forced to settle for all our im- 
ports with ^(jld. 

Followin<^- out this principle we may conclude that the 
only advantage which a country derives from a lar^'e 
production of o>„l,l is simply that it is the fh'st to f^el 
the effect on pr-'ces: it camiot ixi)ect to retain perma- 
nently any more than its proper share of the new v.-ol(I so 
lon^- as trade is free between it and foreign countries. 
it would be uiipossil)le to increase permanentlv the sup- 
ply of o-old ill tr 

us country without 

I'lvmo- the other 




(Miiiitrics llicir pi-optr pi'opoftioiialc share of it unless 
we used il as a suhstitute for other tonus of money 
which were letired from cireuhition to make a place 
I'or it. 

114. Comparkoii of effect of iitrrrasc of .sitpjili/ of 
^(ihl and paper iiioiie//. — l''ollo\\iu_o- out this |)rineij)Ie 
liMthir in eonneetion \\ith eredit money it will a])])ear 
that it is im])ossihle I'or a eountry to increase its su])j)lv 
nf this foi'm of money and kecj) it at a pai'its- with yold 
unless thei'c has heen an increase in the demand I'or 
money due to enlarged \«»lume of husiness, increased 
|)o|.M!lati()n, etc. 

Suppose the (iovernnient were to issue $.'500,000,000 
new United States notes in addition to the $.'U().000,000 
already outstanding in cireuhition. Suppose these notes 
were ])aid out hy the (iovernnient for extraordinary 
< xpenditures occasioned l)y some <»'reat puhlic enterprise, 
Mich as the Iniildin^v of a canal or for materials to carry 
on a war. These notes Mould go into circulation and 
cause the same rise in jjrices as an ecpial output of gold. 
The higher piices would attract imports and discourage 
(\|)()rts and there would he credited against us a dehit 
halance which would have to ])e settled in "old sooner 
(ir later. In this way the issue of n.)tes would continue 
to drive gold out of the country hy attracting into the 
country an ecjuivalent amount of goods from foreign 
countries until a new etiuilihrium of prices throughout 
the world were estahlished. When so much o()ld has 
heen driven out that it becomes difRcult for the hankers 
til find gold for export, the (Government would prohahly 
he unable to maintain the new notes on a par with gold, 
and there would apj)ear all the j)henomena which accom- 
pany a depreciated currency, about which we shall have 
much to say in a later chapter. 







11.). IIoxc mucJi moucji is needed in a eoiinfn/^—ln 
the campaign, of ISiM! we heard a n-nat deal in this coun- 
try ahout tlie scarcity ol' money, and onr of tlie strongest 
aro-.nnents of the Silver Party was that tlie country 
needed more money io do business properly. They said 
that o,„h1s w<re unsalahle because there" was not the 
loney to ])urchase them, li the principles whicji we 
.lave worked out above are true, it would be of no use 
\vii.!t( vcr to increase the (juantity of money in the coun- 
try iKcause if we increased tlie amount we should dimin- 
ish its exchan<.ino- p,nver proportionatelv and the net re- 
sult would be that our. $2.00 would do no" more work than 
tiie .<<1.0() di.l before. \\\ might 'vcn u„ so far as to 
say that a coimtvy always has enough money to take care 
of Its business needs; however, such a statement would 
be misleading if we did not take into cons:deration the 
ejTecl of fluctuating prices upon industry. 

The real diflieully of which the siher reformers com- 
plained was not the insulJicient (luantity of money, but 
the low level of eouiiiiodity prices. Tluy pointed'to the 
western farmer, who was compelled to acet>pt less than 
fifty cents a bushel for bis wheat. 'I'here was plenty of 
mon<T in the country to pay for the and' the 
fanner was really complaining because of tlu low price 
• alher than because of the lack of a market for the 
wlicat. If everything 'he farmer had to iiurchasc with 
the proceeds of bjs crops— sujiplies for the family, 
wages of bis liirv.l labor, taxes, intenst and principal 
«•" borr-.we.l money, wen diminished jiroportionatcly. 
be would have had no reason to comi)lain. The trouble 
was that tin- prices of these things did not diminish pro- 
porti<.nately will, the price of wheat. In the course of 
time values woidd adjust tliemsclves In ib- -.-..- .,,,, 
portions as before. 



IK!. Price changes not s/jnchionoiis. — In the long 
mil (lie <iuantiiy of money has little effect in altering 
relative values; for a short period of time, however, it 
lias a very great effect. The reason of this is that some 
voiiimodities are very susceptible to money inthiences 
and ies})()n(l (juickly to changes in the money suj)ply, 
\sliile others respond very slowly. Stocks and the spec- 
iilati\e eommoditits. such as wheat, cotton, copper, iron, 
1 ti-.. are \eiv easily and 'luicklv inlluenced; wholesale 
prices ))r()hahly I'eel the elfect much sooiK.r than retail 
prices, in which the inlhience of custom ])lays a greater 
part. Wages feel the change consider:d)ly later, jO 
that during a general rise of ])rices the workingman is 
al a disadvantage in ha\in<j to pay moi'e for the food 
and other necessities before his wages are increased cor- 
respondingly. Contracts for the ])ayment of money in- 
crease not at ail. 

'The (juestion of the sujj-ply of money is an extremelv 
\ ital one because ol' its bearing upon our business rela- 
tions due to the variation in the i-esponse of various 
\ahus to the change in the (iiiai\tity of money, t'lianges 
in the supply of money alter the I'elation of one class 
to their advantage and to t!ie (hsadxantage of another 
class. An increase in \\\r sujiply of niontv j)uts cred- 
itc's at a disadvantage and favors debtois; it increases 
the ])rofits of Ihe producers of raw materials at the ex- 
pense of the wage earners. iiioi( i speeially to the disad- 
vantage ol' the recii>ients of fixed incomes. 

1 17. Stimiildtiiiz effect of risin:^- prices. — There is 
one effect ol" increased money s!i|)j)Iy. the benefit (d' 
\>hich has no corrcsjjonditig disa<l\ anta^v for tjie time 
being. Hising p<riccs of commodities stimulate industry 



n... .1... 

,1 (■ 



..I . 


hich enter into capital goods. This increase in indus- 

.; ^; B » l l jfl 


:^ro^EY and bankixg 

trial activity leads to IJic nnatc r production of wealth 
in the form oi' coiisunijjtion i-oods and means a greater 
i)er cai)ita distri' ition. Therefore, economists have 
coneluded that a condition oi' oradnally increasing- prices 
is the ideal one for any community and since it is within 
the }K)wei of a community through the aoeney of (iov- 
ernment to regulate the rise and fall of prices throuo-h 
the mani|)uIatioii of the supi)ly of money, it is possihle 
to make oreat economic in;|)i-ovements hy this means, as 
we shall diseox cr in a more detailed examination later. 

lis. 7/<Y/(7/o//.— There is as much to fear fron> rising 
as from falling ,„-iees if the tendency toward higher 
pr - levels is allowed to run into speculation, t! over- 
expansioi. (,f eredit and the inevitahie collapse which fol- 
lows. Whether it is j)ossihle for a Government to so 
regulate the rise of prices through Ihe manipulation of 
the ol' money that the evil conseciuenccs can he 
avoided is a matter which may one day hecome of great 
iniportanee. especially if the unregulated production of 
gold should go on increasing at too onat a rate. 

In the present diaphr we have seen that the value 
of gold and conversely the general kvel of priees is de- 
termmed hy thr supply of and d( niand tor money. The 
value of money at any j)artieular moment rejjresents the 
eciuilihrimn hetween these two forces. Kach of the 
forces, however, is eom|)ose,l ,.(' ;, u,vat numher of tend- 
encies. SouHtinies lliere may he ;, particularly large 
''•"i;uid Inr n,,|,| j,, ,,,.,!,.,. I,, ^.xcliaiim. a large volurne 
••I' prndn.v. while at the siiuu- time lli.' demand for goM 
as a store of value may decline: the force of denwind 
"'"■••f'Te is iiie tinai nsuit of a numher (.f ten.leneirs 
and countertindencies. 

Ill>. Sxcifliis (if lU-irrs. .Vn !■-!!•>>!!•;..>- .--.f 4!... 
strength of Ihe <lemand for m-mey at any parlicidar 



time or a prediction as to a i'utiirc dfiiiaiul is facilitated 
In- the fact that the dian^es occur, not ahni])tlv, hut in 
U-real swinos. These orcat swing's in the vahie of irohl 
are .sinij)ly manifestations of tliat oreat hiw of nature 
\>y which all |)ro^ress occurs rhythniically and not stead- 
ily in any oiven direction. The course of prices on the 
stock exchange, the recurring- periods of (lei)ressi()n and 
prosperity, the ,iireat cycles of rainfall, are examples of 
tiiis o-reat natural law which is found to prevail ^roncr- 
ally throughout the universe. 

120. Cmnulativc effect of caniomk' forces.- ~'Y\\ii ex- 
planation of these (rreat economic swiiii^s of jjriccs and 
values is to j)e found in the cumulative effect of the 
economic forces. We are all familiar with the oeneral 
pessimism that han^ys like a cloud over the eommuiuty 
during an economic depression. The ohvious fact that 
die existin^r sujjply of m(„„1s is steadily diminishing^, 
diat tile savings deposits of the j)eoj)le are increasiriir 
in amount in conseciuence of the hard lesson of thrift 
which the jxople have learned in the hard times, in 
^pile of the steady deterioi'ation in the industrial e(|uip- 
ment of tlie country, the wearing- out of the rails and 
rollin;^' stock of the railroads all lliese factors instead 
"f inspirinn- confiiUricc I'or llic future amonn- husiness 
men are even used as an ari^ument for continued hard 
1 .rues. 

When the inevitahle demand for ^roods uhich has tem- 
I'orarily heen delayed finally heoins to assert ilsi'lf. at 
tiist slow ly. the husiness community ^raduallv heoins to 
liope that prosp( rity is returninu'. As the prosperitv 
continues the ( lunulativc effect of n turnintr confidence 
makes itself felt in ri^inu prices, and since an ad\ancc 
::; j/iur--, r;i(,iFis iai;:;er jMi>iii> io .inximiix owuiiio an\' 
kind (»r pio|,erly t \e( pt ukmkv itscll'. tliire arises an 

,-, ^^.W 


tiff £ 



enormous; (Icmand for income yielding property of all 
sorts, even that whieh i)roniises to return only a specu- 
lative profit. 

When industry is at its heioht and prices have l)een 
l)ut to record hreakin^r levels everyhody is optimistic and 
hopeful of si ill l)ett>er conditions. It is at a time like 
this that the careful ohserver will note that the produc- 
tion of hoth consumption and production ^yoods has in- 
creased tremendously and will likely soon surj)ass the 
needs of the conmiunity. lie will note that the hiu'.er ^ 
prices ^o the smaller is the i)rospect of still further ad- 
vance and the nirater the prospect of a recession to 
lower levels. He will note that the rate of interest is 
very hi«4h. indicating- a scarcity in th«' -uiJijly of loanahle 
funds. His conclusion from this ? of affairs will he 
that in the near future there must inevitahlv he a "-reater 
demand for money and a coiise(]uent increase in its 
value. He also will remcmher from previous experi- 
ence that the cumulative e+lVct of human cujjidity and 
optimism which has carried |)rices to ahnormally hiyh 
levels will have exactly the reverse effect when it is 
turned in the opposite direction. When the turn comes 
and the downward tendency l)e^ins a corrcspondiu"; 
scranil)k' to dis])ose of ooods and to ^et money in order 
to realize the increase in value will set in. 

These ^reat swings in prices offer an exj)lanation 
of the fact that for hn\'^ periods of time an increased 
demand for money has se( ined to he accompanied hv 
a fall in value of money instead of a rise. The natuial 
etlVct of dema?id in this case is simply sus|)endc(l for 
the time Ixino. }„,t whci it a^ain asserts itself if will do 
so with far more than the ordinary conse(iuences and 
v.ihh> mil i.L eariied mucli lower tiian liiey otherwise 
would he. 




V ■ . *l 

121. "Short" sales of moncjj. — Every buyer and 
srller whatsoever is a speeulator in niniiey. though he 
may not realize it. Kvery debtor and erefhtor is not only 
;i s|)ecnlator i?i money but lie is a sjxenlalor in "I'n- 
tiH'es." Kveiy debtor has sold money short in exaetly 
the same way as a sj)eeuIator on the board ( I' trade has 
Mild wheat short when he has eonti-aeted to deliver a eer- 
l.iiii number ol' bushels at a ^ixcn \)v'\vv at a future time. 
lie gains or loses as the price at that time of delivery 
lias fallen or risen. 

It is an axiom in the speeulati\e markets that there 
1^ no better guaranty for the maintenance of ])rices 
than the existence of a large sh.ort intertst. the reason 
lieing that those ])ersons are ])otential j)iircliasers who 
iiiust buy within a gi\en time whether they wish to do 
^o or not. 'I'hus in times of ere<lit exi)ansion when [ho- 
|)le are going inti debt in order to extend their business 
(ir for the purpose of buying something which they hoj)e 
to sell at a higher price later, a large short interest in 
money is being created and as the time of maturity aj)- 
proaehes it is ine\ital)le that there must occur a scram- 
i)le for money with which to satisfy the credit contracts. 

Vl'l. "S<iinc\'niii- the shorts." — When the credit ex- 
pansion has extended to an cxtraoi'chnary degree there 
.ire not lacklig shrewd bankers and cxix'rts in finance 
who reah/.e thj^' au'.u'oac!'.!!!" r!( in;!!!:! Inr !!«m!!(\ !!!•*!!••*» 
the ordinary Inisiness community; these men (|uictlv ac- 


M0M:Y AM) 1}.\NKING 


ciiinulate a stoiv of funds. Tluy may do tills to such 
an rxtcut that there suihlenly (k'\cIo|)s a coiuhtion which 
ini^dit ahuost he called a corner in money and a scjucez- 
in^' of shorts follows. This j)r()cess of •\s(iuet/in^>-"' the 
money shorts is more familiar under the name of a 
money j)anic. 

A man who finds hirr.self ol)liged to make a payment 
at a certain time has a choice of one of two courses; he 
may either l.orrow or he may sell something he possesses 
ill order to provide himself with funds. In a severe 
money panic it is practically imjxjssihle to horrow 
money, even upon the most select collateral, and there 
have lieen days on tlie stock exchange when call money 
ran as hi<4li as ISC |)er cent per annum. 

12;}. Forced selling.— Vudvv such conditions the only 
recourse of the dehtor is to sell whatever property he 
possesses, at the hest price olitainahle. This sudden 
pressure of sellino- ,i])on a market which is disinclined to 
i)ny will iH'rmit pi'ices io descend to a level which would 
have seemed alisnhitely ridiculous a few months previ- 
ous. There are not wanting- at such times shrewd peo- 
l)le who reaii/e that there are extraordinary i,.ar<rains 
to he found, hut it is only a \'vw of these shrewd people 
M-ho lia\e the means to huv at such times. The <>Teat 
majniily of jjfople. however, do not recooiiizf these iiar- 
gains. even if they have the I'unds; and instead of huy- 
ing in a market which offers them a practical eertaintv 
of an increase of -J.-) to 100 percent on their investment, 
they prefer to kecj) it stored away until the strinoency as 
well as the hargains have become a thitiir of the ])ast. 

124. I*t()/)lc hccnniiif/ better educated There was 
evidence, howexcr. in the panic of IOO7 that the peoiih 
ii. gLiiCiui .in u, 111111114 10 iaixe a(i\antaye oj tjie oec'a- 
sional opportunities which these great swings of prices 

TiiEoKv or rincKs 


nlVc r tliein. The ixxiks of the ^reat corjxjrations siicli 
,is llif riiited States Stfcl Corporation, tlie I'tniisyl- 
\;iiiia l{ailroa<i and liundrrds of otliei-s. ^liow a urtat in- 
crease in the nninlier of stoekliolders after Oetoher, 11)07. 
'I'liis is a most hopeful si-^ri that in the future, as the 
prople i)eeoine hetter e(hieated in finaneial atl'airs. thi' 
lliictuallons in \alues will I)eeonie le^s and less pi-o- 
piHineed. It would i)e iinpossihlc to o\ erestiniale the 
uieat eff'eet in this dii-eetion wjiich the I'eeent hn\ue out- 
put of literature on financial subjects has hroun-ht aliout. 
12.5. General price level. — Whenever we have spoken 
of the effect of ciianoes in the value of money on prices 
we have always sj)()ken of it as a clianoe jn the "^'•eneral 
price level/' The risino- or falling- of prices due to a 
iliange in the money sup])ly or demand is slow and 
Ui-adual, while the changes in prices due to causes af- 
fretiufT the sujjply and demand for goods may he sharp 
iiid sudden. Fui'thermore, the prices of some floods 
may he rising while the prices of others are falling. 

ri(). Price iahle.s.-'lw the first place, therefore, it is 
necessary in estimating the effect of money to ( liminate 
all those causes which account for changes in the prices 
of goods. In order to observe the changes iti the gen- 
; ral price level price tables have l)een constructed. The 
ideal price table would of' eomsi' repiesent the average 
]»rice changes of all the commodities, the exchange of 
which creates a demand foi- money. Since this is im- 
possible the most practical method is to take a certain 
iiumbei' of repri'sentative commodities. 

127. Mail// coiiinuxliiies. — Such a table must not be 
ronlined to a few commodities nor io one class, because 
there might !h' special eausts for an adx.mcc of ni-jces 
i'\' that |(;u'licular class. .\n iiislaiicc of Ihls wduld be 
i!i com?nodities re|)res('nt mil; naiin'al resoui'ces and raw 


materials. A price table composed of wheat, corn, lum- 
ber, coal, cotton, would show a rise in price in the last 
ten years much greater than could be attributed to anv 
chano'c in the value of money. The reason tor such a 
change would be the increase of pojnilation relative to 
tiie suj)ply of natural resources or the area of land 
producing- them. 

On the other hand, if we made a price table composed 
of solely such articles as silk cloth, watches, articles man- 
ufactured from tine metals, etc., we should find that the 
average price had [)robably fallen within the last ten 
years, the reason beinn- that with the improvement in 
labor-saving machinery and the greater skill of modern 
workmen the cost of production was considerably dimin- 
ished, so that tile fall in jji-ice would more than oft'set 
any diminution in the value of mojiey. 

128. ExdDipJc of price ttthle. — It is therefore clear 
that a price table should be composed of such a variety 
of commodities that the influences affectino- the value of 
the })articular classes will counterbalance each other. 
The j)roposition has been stated above that a general 
rise of values is absolutely impossible in the nature of 
things, since value is a ratio, and it is im])ossil)le to alter 
the relation of things by e(iual changes on each side. 
We give below a samjde in outline of a price table con- 
structed to show the price changes over a ])eriod of two 

1890 % 1892 % 

Wheat ^ 1.00 100 I 1.10 110 

Caftlp .^O.OO 100 (in.dd 1 .>() 

Knives 20.00 100 1,>.(M» 75 

Silk clolh l.iO.OO 100 K'0.00 80 

4) 400 :J85 

100 9fi-i.4 

In this table we have made a hypothetical list of the 


prices in 1890 and another for the year 1892. These 
[)i-iees should i)ieferah|y re])reseiit an averafrc for a pe- 
loid of time in ordei- to avoid any accidental lluetua- 
tions due to the season or otlier tenmorary causes. The 
piiees for 1890 have l)een made the hasis at 100 per cent 
and the increase or decrease calculated witji reference to 
this hase. This table will show that while some prices 
lii\e advanced othei's have fallen so that the «feneral 
k\el is dinn'nished .'J-"' ; per cent. 

129. "Wcii^lilin^" of price tables.— U may l)e ob- 
Mcted that in this table we have giren exactly as much 
importance to knives as we have to wheat, whereas we 
know that a chaufjre of a cent a bushel in wheat would 
have vastly greater etrect on the demand for money than 
a change of 100 per cent in the value of knives. To cor- 
rect this difficulty a system has l)een devised for "weiglit- 
iiiy"' the xarious items in a ])rice table. The principle 
of ■'weif^hting" is to find some basis of estimatiuij;' the 
amount of the particular items and exchauoe either on 
the basis of total j);-')(luction or consumption. 

To wei<>ht our jjrice table above it would be necessary 
ill arrange the four items so that wheat would have an 
inliuence on the result let us say one hundred times as 
-reat as km'ves: thai cattle would have an importance 
lifty times as great as knives: that silk cloth has an im- 
portance say ten times as great as kr)ives. The table 
modified to conform *^o this weighting ari-angement is 
given below: 

18!)f) ISO J 

v.'iicit 100 X sp 1.00=10(1(10 .-«— noooo 

'■ittlc .40 X .jO.OO^r ,)(I00 ()().00=r (jOOO 

Knives Ix JO.OO = 100 l.").()0= 7,5 

Silk cloth 10 X l.>0.00= 1(100 l.'(M)0=; 800 

I'll 16100 17875 

1007o 111 i 161% 

While the weighting of IJie price table seems to pro- 





(luce a very oreat eflVct upon our .sample tal)le, yet in 
inakirijU,- actual tables where the numher of coniinodities 
is much greater the (litfereuees shown by simple and 
wei<Thte(l price tables are very slioht, and since the total 
result of any price table is but an approximation, it is 
doid)t('ul whether the weighted ])rice tables are much 
more accurate than the simj)le i)rice tables. 

130. Advduid^is of i^-ci<^litinii: — The principle of 
weighting is important when changes in the price level 
for certain purj)()ses are desii'ed. For instance, if we 
desire to know whether the average cost of living for 
the workingman's family has increased or decreased, the 
])rice table should not oidy show the items which enter 
i?it() the consumjjtion of tlie family but tliey should be 
weighted to show their inijiortance in the family budget. 
Tables constructed upon this })rinciple were prepared 
by Professor Falkner in the most elaborate investigation 
of prices that has ever been undertaken in this country. 
The report was })repared for a Committee of the Sen- 

131. Falkner price table.— Yor this table lists of 
j)rices of 00 commodities were covered from 1840 to 
ISDl; and 223 commodities were covered for the ])eriod 
from 1H()0 to 1801. The investigation was conducted 
with great care and expense, the prices being ascertained 
from an examination of merchants' accounts. Several 
tables were i)repared from this data which are repro- 
duced herewith. In the first table the average per- 
centage of ])rices for various groups ol' commodities is 
given separately, the year 18(;o being taken as a liasis. 
or 100 \)vv cent. The average ])rices of all the com- 

' Ifcpnrt 1)V SciKitor Aldricli for tlii' Coniiiiitlce nn Fin.inrr, Mnn-h 'A, 1>;0i, 
Senate Oocutiicnt. 5 :nil Cdiijfress, seeoiul Session, No. 1394, "Wholesale 
Prices, Wages and 'rriaisjinrtation." 



niodities taken had decreased to '.).:.-' per cent in 1891, 
an avera^-e of 7.8 per cent. 









fi 2 1 

■^ fa u 

l-K» 96.() 110.7 

I'^H in. I 11:5.1 

i'^y- h-'.!) 10(1.!) 

1-^1:5 79.3 <W.!I 

l'"^^ SI. 6 lOJ.O 

I"!'' 87.3 97.1 

|''^»i ,')|..(i 9,).:? 

I'-V7 9t-.7 

I>1S M5.5 K7.,i 

I>^t9 79.0 8.'..' 

l^.iO 85.5 91.3 

IS51 9().(j 91..7 

185.' 88.7 88.7 

l^^fU 101. ,> 98.() 

l^5t 10,-,.9 1)7.}. 

1S55 111.8 9U 

1^5G 110.). Kio.ii 

1857 117.5 lOfi.O 

1 ^^58 9 IM iis.O 

1>'59 'Ji^.S 101.1 

iMiO lOO.O 100.0 

1>'<>1 95.8 !)1..9 

!•'((-' ll.).! IJt.I 

i^(i3 i:5:i.o loi.i; 

IMil 1G5.8 .'(io.7 

l>f>5 .>1().5 J99..' 

i^'iifi 17;i.s .).'(i.ti 

1^^1)7 l(l,{.9 179.9 

iS(i8 Kii..' IKi.s 

!''li9 l(i.>.9 U7.5 

l'-70 153.8 l;!H.t 

!^71 1(J9.3 l:i:i.3 

i-'7i 133.3 113.0 

l'^73 l.Hj.H 13ii.9 

l''7V 131.5 l.'7,9 

!>^75 130.5 l.'O.l 

:-:7 I.>o.;{ 101. M 

1-T8 107.0 |i;i.,> 

1^79 91.1 


w "-" 

— -Z 


C w 






1 15.8 

















1 Iti.l 

170. (i 



1 1 1.7 


1 .' 1 . 1 


1 .'A.:, 





lift. 7 









1 11.8 


1 i:!.s 



I. '3. 9 


II 1.0 





1 1 J.:> 


l.'l. 7 








101. -V 



97. (i 

II 1.0 

1 .'0.5 



1 ().'.() 



1 J.i.ti 

I .'5.(i 


10. '.3 





1 .'0.0 





















10-. 1 

1 1 .'.9 





















1 1 -'.5 














100. J 
















1 19..' 








1 If). 5 






J .'1.3 



















If) 1.3 





1 7-'..' 




















1 l-'.3 


1. '.'..' 






1 1!)..' 









in. 5 




1 19.«) 









1 13.7 



I. '.'.9 


1 Hi'. 

] '. 1^ 1 




; ; \ J 

i i'p.i 

los.o 100.0 l.',-,.8 1TJ.3 




9.'.1 llii.s HI..' 

M.3 111. 

95.3 88.t 115.1 110.9 68.(! lO.'.l 






:\ro\i:v and it wkixc; 


y o ^ 3 %^ ■=.- - --z ' ~ 
_^ ^ ^ ^ P. ^ c ~ 5 < 

[!;:;'' !';'■;' '"^-^ h)o.~9«;3"i:{o.9~Yi31~85.71o9.h i,.,;., 

^'- '^.^ "'-^ I"- ^-.' 'ii:i !)s.I 77.,-, ii7.:i i.m.d 

^^;^ ';:-l ^l-': ^"•" '--l l^'i" ^'if 7<U yr.i y;^:., 

'^''1; ""•■' ^•'•l Wi-' TVh l.'S.-, s.\.\) (jsi. ul;i (,!., 

^;;' '"^-f ^^•' *'«•"■ 'I-!' l-''i-5 K{.(i (iti.t h^.o y.Mi 

r^^,*^ '""^ >'^■' i'l.i) 7l.y l.'t.H Wi.d ,,,;.y sy;{ yi- 

^^ '"••' ^■<-'* !•'■;< '^.i' 1^1.0 J'S.s r.i.o sh.s y+'} 

^'" '"^■•* ^-'-^ !'•'■' -i.-' i-':5.: ^r.y .ly,^ hy.7 y.';} 

^"^"^ i'>->-» ^l -l yi.U 7t. D 1J.>.3 H(i.:{ 70.1 95.1 9.'. J 

Til the second taMe we Imve a taljulation of the .same 
data in Mei<ilited i'orni. In the eoliiiun headed II! 
pereentaoe uiven represents the averane I'o,- all artieics 
aeeordino' to their imj)ortanee in the hudoets of the 
averao-e family. In the eohimn headed I \' the author 
attempts to reach a s^J!' 'v^dier |.')!nt of aecuraey hy 
assumin^r that the articles covered in the data represent 
over (;8.(; per cent of the total e.xpenditnres of each fjuii- 
ily. The difference in resnits |)rodnced hy these dif- 
ferent methods seems to I)e rather small. 


— i "pit* -nib i 

.i_ a '" •= 'i. y--= — •• 

i< t^rf 'i c'^-~ 

i' « <a: -i I = = t .i ^ = ' -= 

^ < '""''' = = ---. 

»S^^ loi j; 89.3 Si 





99. t 






Simple arithmetical 
averages. All ar 




. lo' 8 




10 ;.5 










. 1(» ' 7 


109 1 



I'^j.j .. 

ii:i 1 




1 1J.5 


101 8 


100. J 




. 100.6 







1 Sli,") 

. . . . .'16.8 






ICO 5 




1 t.'.a 

























1 *>-:5 


i^'sl. . 


1 SS,') 


1 SS() 




! --SS 


1 SS9 






































1 30.5 












^ E J; g 

K _ 

■ v: ti . - {i 

~ ^ c ^ — 

'Z. ^ ^ . — 

!: -S "^ c = 

- C c fc 5- 

























1 73.9 
























V.i'2. II ',()}, prirc.s (hirhi,/ Ihc Civil ff'ar. It will 
''^^' n..ti(r<l tliat t!ir pri.T-, ,|,,ri,,o. [U,. c'lvil War 
I'(Ti(.(l an- extremely iiiuj,. the pereeiita^e lor llie vear 
18(;:,bcin:4 i>l(;.8 per cent. This extraurdinarv rise is 
due to tlic faet that the prices were ^aleulaied in (lci)r(- 
eiated i)ai)er money. AVe liave inserted 'rai)le Xo. 4 
shouino- tlie a\erane prices rechiced to a <rold basis duv- 
in,U' the period when <^-reenhacks Mere depreciated. This 
table will show t„ what extent the extraordinarily hioh 
prices of the Civil War were ,hie to the inflated' pap'^er 
currency. As we have explained elsewliere, most of the 
people at that time did ]iot re<rar(. (he paper currency 
as depreciated. b„t thou^'.t gohl was appreciated.'' 
The fact th it then was nolhino- connected with tiie sup- 
ply and demand of commodities in General which could 
account f(.r the more than douhlinn- (,f the prices in the 
year 180.5 is evidence that the cxtrt ine In. tualion of 
Jtrices to doe I,, iii<.n'\ ratlu )■ r m to ooods. 

The figures ^yv have .pnk. n ..j .,s perrenta-es are 
usually calle.l nulcx nnmi.ers Th- v priee tables pre- 
pared by Professor Falkncr were continued in the -l^il- 
leun of tlie Department of Labor," ^ and the index 
numhers for the simj)le table for the pc riod from 18!>1 
to the year 11)10 are ^rjveu on tlie follovvin.r pane: 

1 The .l,-iii.iti(l for (• ^mnl.ark as moncv in IS.i.' must <r.t.iinK- Invo 
Keen ...u.h ..s ll,..„ .( I,,.,,,, „,e ,|,.„.,,„.,- ,„r p.l.l i„ , re-- l\'ars 

-Sr.- "llMil.tii. for tix- IVi.artiM.rit' ..f l",J,„r" for MHrcli of ,,,.1, v.... 

iiie IJ. urinient of I.«|,or Ims nmintaiiird a price fahi.- in its i,i,ll,.tin 
«rranj:r,l on a basis .lifT.-rcnt from that of t.u- Falkncr tHi.k'r. 

ifi i 







1 . 











C So 

c ao 





























10:.' 1 

148 6 






)^»,' ^ 


.. . 122 r> 

100 5 


1 H(i, ■) 

100 3 

■^1(> 8 





+ ; 

1 S(i7 

1J7 9 

IT ' ' 



1 '1 4 







1 22.0 

-I ■, 







' f 









1 36.0 





] 27.2 



















-1 ;- 

























lOJ 7 




























isrtrt. ... 







1 «!)() 


11 -.9 























isit.i. . 











88 S<hll 







8fi (liMh 

.• 1900) 





87 (( 

















1 !»().». 





























I!t06.. ,. 

iiH j 


mm 1 

1 'Km 










l.'W. Forcio)! price ta})lcf;. —The index minibcrs given 
in the last three eohnnns of the tal)le are reprodueed 
from the most imjxjrtant lorei^n investi<>-ation.s. The 
Sauerheek and Economist tables are Kn<4!ish, the Soet- 
beer tables are (iernian. Tiie table of Mr. Augustus 
Sanerl)eek was pnblisiied in the Journal of the Hoi/nl 
Statistical Socicf//. His indexes are eonijjuted by a 
sim])le iinweifrjited arithmetieal average, lie lias en- 
deavored to arrajige a limited number of eommodities, 
all of whieh rejjresent raw jjroduets, in classes in such 
a way as to be e({uivalent to wtighting. 

The Ecomniiist *ables have the distinction of being 
the first to be coi.., led. Twenty-two articles oidy are 
emi)loyed in this table and the (juotations are those of a 
given date, either the first of .January or the first of 
.Julv on the averages for the year. The commodities 
arc chosen disproportioiKitely. tjicre })eing out of the 
twenty-two, four in which cotton is tlie })rincipal ele- 

The German tablf of Soetbeer was fre(|uently re- 
ferred l() in the Silver Controversy in this country in 
IH!M;. The iiumb( r of coinmodities was over three hun- 
dred and the result represents the simple unweighted 
arithmetical average on the basis of the vears lSt7 to 

As we have indicjited b( fore, the value of the study 
of the science of money and currency is the understaud- 
nig it gi\es ns ..f the significance of price changes and 
the d.ita I rom uiiieh j)rc(lictions as to tlie course of prices 
^'•"' '"■ '";"I<- it is therefore important t(. get clenrly 
111 mind the m;iin points of the two j)reeeding chapters. 

In the first j)l;iee a g,ii,.ral , ise in tli. prices of all 

' "" '*•••' -"i^'» • iC't'N iiiiiir.iirs iln rcMsiin is to 

be found ina eh:tnM-ein the \alueof money as comiiared 



uith other things, since we know that a general rise of 
\ahies is c. impossibility. The rise and fall of general 
prices is best indicated by means of price tai)les which 
cnrrect the errors which a limited observation would be 
likely to incur. The most convenient and acceptable 
j)i-i('e table for the average business man i< that |)ub- 
lished in the bulletins of the Department of Labor. A 
study of j)rice tables will give the student an idea as to 
l!if stage of the swing at which the observed ])rices are. 
l.'U. Economic forces to he observed. — Observing the 
present tendericy of prices he will endeavor to find the 
reason for the tendency. lie will find almost any time 
;i iiuml)er of reasons to account for a I'ise and also a 
number of reasons t(> account for a fall. This makes it 
lut'cssary for him to estimate (luantitatively ibc ))olency 
nf each one of these foi'ccs and to balance one against 
the other, in order to discover in wl ich direction \)\g re- 
sult of these forces tends. The most iinpoi'tant oi ihese 
permanent forces are as follows: 

1. ProiJuctiou of ffohl. — At the ])res('nt lime it will 
Ik found that the annual production of ^old is increas- 
ing. This in itself means a lowci- value for gold inas- 
iiiuch as only a very small (|uantily of gold that is once 
lirought into existence disa])pears. Xearly all of it is 
idded to the stock already on hand. It is estimated that 
It ss than MO per cent of the gold amiually produced is 
!is((l in tli< arts. \\\v\\ this amount is not prrmanenlly 
v\iihdrawn I't'om iiionctary uses, siiuc it is so »asy to re- 
ihice old jewelry and plate to I'oin. 

2. I'sr (if siih.stiliih s Inr uioin//. An increase in the 
Mii)ply ot' lint <ir credit money has the same elVeet on 
|)rices as an ineicase in tlit supply ol' gold. The ui- 
rrease ui C io\ (I'liUKiii issues is |)in(i\ an iii iiii i ai \ inai- 
t( r aiid it' it occurs in oiiU one cdiintrx at .'inv gi\t'n 




tunc It is likciy to (lisi>l;tcc tilt- pn.portioiiate u. )ount of 
ynlil uliicli will l.c- export '1 from the country as a re- 
sult oi' the ( flVcts produ. upon the forei<,ni'exchan^re 
market hy a rise ..I' prices. The first result of an in- 
crease of (;overnnient paper money is lii<ely to he a rise 
of prices, hut after the ecinllihrium is estahlished in the 
course of a feu- years, other thinos l,ein<r equal, the 
])rices are likely to return to their former level. 

The increase in the amount of credit which serves the 
purpose of a medium of is highly important. 
This medium depends upm, the deuree of perfection to 
which the hanking machinery of a community has heen 
developed. Ati increase in the numher of hanks and 
trust companies and in the capitali/alion of old institu- 
tions indicate increased credit facilities which are ccjuiva- 
h'lit to an increase in the supply of the medimn of ex- 
chanov. l-",„- sho, t periods of time the periodical infla- 
tion and deflation of credit, producing the alternate 
l)'H)ms and panics, must he taken into account. In the 
year 1!>0S there was a considerahle reduction in the 
••nnount of credit ..ver the year 1!»()( . uhil- the numher 
of hanks and the amount of cajjitali/ation a-iually in- 
creased. The total hank clearings ,,f the principal 
cities of the I 'nited .States are a much hetter index of the 
v()lume of credit doing money work than the numher 
of hanks or their capitalization. 

ii. roliniic of pnxlui'tioii. It is ohvious that the 
greater the amoimt o\' goods produced the greater will 
he the numher u\' hiddcrs for money, offering goods in 
exchange. [ 'ndrr modern eniuiitions j)ractiraily all the 
goods produced represent a deman.l for money," as they 
'nust eh.i ige hands hcfore they are eonsimied. 'I'he 
jn.Min.rr nowa(iays very rarelv consumes his own prod- 
uct. ■ ' 




All increase ot" [jopulatioii means simply an increase 
n the amonnt of ^rjods prodnced and consumed and 
iiuans a greater competition for the cxistin^^ supply cf 

I. E.vtrava^ant expenditures of the people. — During 
the tinancial difHculties following the panic of 1<>()7 a 
ureat deal was said ahout the efJ'ect of the i>rowini>- ex- 
ii'avagance in personal expenditure on the ])art of the 
lK'o))le of this country during the preceding lour or live 
years. This was held l)y some to be the cause of the 
stringency of the nioney market. 

Of course the moie extensive purchasing- by the peo- 
l)le represents an addition to the bidding for goods and 
tlie offering of money, so that we might ('(,nclu(le that a 
lise of prices would be the result. On the other hand 
( xtravagant expenditure could not have ai)peared uidess 
incomes had been considerably increased. Increased in- 
comes are due to a greater productivity. People pro- 
luce more goods and hence have a larger amount to sell 
'irfore tbi'\ can realize their income. This enlarged 
production of goods causes a l)idding for money, whieh 
I Dimtei-balauces the eidarged bidding foi- goods, that 
Inllows immediately upon it. Thus the intluence upon 
pi'lces is diminished. 

1.'J.5. Saving aiuJ investing. — If instead of si)ending 
Mieir incomes in living expenses tjiese people had em- 
i)lovcd them in ativ other wav excei)t hoardiu''- cither 

' • • • I r> 

lepositing them in banks or in\('sting them in securities 
'lie |)rodueing power woidd sim|)ly have changed its 
•nvm and !!!st.;!i! (it' causing a bidding u}) of pricci^ of 
<•on'^umpl ion goods would ha\e iiad :\ sitnilai' cfVeet in 
itinneetion with production goods. Mone\' deposited 

I! hanks or invested in seciuities is sim|»ly turned o\cr to 
industrial and business enti-rprises. when it is spent for 





^^oods, thus having the same effect on t!ie general level of 

The effect of the expenditure of incomes for con- 
sumption ooods instead of for production goods has no 
immediate effect on general prices, hut it has an in;- 
j)ortant effect upon the future production of goods. 
KxjKTided upon consumption goods, the effect is to di- 
minish the supply on the market and encourage indus- 
trial activity to rcj 'ace them. 1 f incomes are generally 
saved and invested they lead to a considerahle enlargJ- 
ment of the productive capacity of industries and even- 
tually lead to an increase in the quantity of consumahlc 
goods to he marketed when the factories and machines 
and equipment hegin to run a product. 

The deductions from this are that extravagant per- 
sonal expenditures tend to raise prices of consumption 
goods and to retard future over-])ro(luction. .Saving 
and investment are lar more likely to he the immediate 
cause of a j)anie and depression on account of the larger 
(luantity of goods upon the market after the production 
goods have l)een installed and before the consuming ca- 
pa<' ty of the country has caught up with the productive 

A much more reasonable cause for a panic than ex- 
travagant expenditure is to hv found in the unreas-na- 
i)ie expansion ol' credit, which is likrlv to he hn.uglii 
about by rising prices and larger profits which in.lmv 
men to undertake productive enterprises far in excess of 
the present consuming poutr of the people. The in- 
creased bidding for money which such nvrr-jiroduction 
Inings about gives the imjjulsc to a cumulative .leniand 

t'"i- money and a rai)id rise in its value compared with 
..It,, .. ii •., ' 

-.■■;!ivi liiiiigij. 



The rule therefore, ui)()n wliich prechetions as to the 
t'uture course of prices can he made is this: 

Do (\iititinff and future cotnlitioiis, tahcit as a rcholc, 
•.ttrraiit Ihc conclusion that the hiddinii; for )iioiu\// or 
Ihc offering of goods' xcill t>c stronger than the offering 
iif nunicy and tJie bidding for goods? 



13(5. liclation hiixcccii foreign a/ul domestic ex- 
cJuni^c— in a precedino^ cliai)ter mention has been made 
of the proeess hy wliieh the o(,I,l jjnxhieed in any })art 
of the world is (hstrihuted thronnhont the worhl. In 
the present ehapter it is proposed to study a little more 
closely the details of the proeess of the distribution of 
money and the methods of makiny- payments between 
distant points. 

The subject of foreJnn exchanoc is usually re/:.-ar(led 
as excecdino-ly eomplex and teehnieal. The'reason for 
this is tjiat some of the fundamental prineii)les are but 
little understood. The prineiples of forei^-n exchan^re 
ai-e exactly the same ;is those of domestic exchani>e. the 
oidy diirerence beino- that there is in foreion exchanoe 
the added element of translation from one coinage basis 
to atiother. 

137. Painncuts J>// dikuis uf fmlii Imlunct's.—'Vhc 
liandlino- ,,f actual currency in transactions of any size. 
even Ihounh the currency be in i)ai)er notes of " larije 
det.ominations and the transaction takes |)lace loeally. 
is incotivenit-r,t. It is one of the functions of bauks to 
obviate the necessity of makini;- payments in currency, 
by means of a cIk ckin,..- system. 'tIic whole i(ra of 
makino- |)ayi.ienls and settlino- accounts without !l <■ u'> ■ 
of cash deixiiijs unon the f.';! ! I';;! !!!•..-!. v .-•=.:•»::;=■. ..:. 

.stances a creditor is just as willing- 


lo leceive m pay men 1 

UOMKSTK AM) FOKKKiN I.Xc i i.\N(;i: ]i;) 

llic ri^lit to (kiiiniid itioiuy as lii' is to rttfu c the cash 
ilM If. Ill cases of lar^e Iraiisaclioiis il wouhl he coii- 
sulei-ed a tcreal hardship on thi' part of the rccij)iciit of 
the payment to he re(|iiire(l to accept the eun-ency. 

i;JM. Funclidii of I lie Ixnil,' iu ind]yiii<j; jxniiiuitt.s. — 
.\ hank Is an institution which permits persons to create 
( recHts eitlier })y the deposit of cash or hv horrowino' at 
M)e market rate of interest. l''urthermore it permits 
iiese creditors to (h'aw onk'rs ii])on it for anv amount 
lip to tlie hmit of their erecht. These oriKrs or checks 
nive th.c holder the ri«4lit to demand the cash or to create 
I ic<ht for himself hy a deposit of the checks. These 
credits on the hooks of the hanks in favor of their pa- 
lions furnish a mi-uis of j)ayment Mliich has almost 
sii])crsede(l tlie use of cash in transactions of anv size. 
If there were only one hank in a town all the checks 
drawTi against it would return to it. either for payment 
or (lejKisit. If there are several hanks in the city some 
M)rt of clearing system is retjuired for settlinir the dei)it 
and credit halances among- the different institutions. 

l.'J9. Pa//iiiciit.s at (I disiducc. — When j)aynients arc 
to he made hetween distant localities the matter of dis- 
i'"ce iiicreases the comi)lexity iA' making the si'ttlc- 
iiiv.its, l)ut the prinei|)les remain the same. If a husi- 
ness man in Chicago wishes to pay a hill in Cincinnati 
he will prohahly draw a check on his local hank exactly 
IS though his creditoi' did husiness in the same citv. 
The Cincinnati man will (lej)osit the check in his local 
hank and i)ut ui)on it the hurden of making the col- 
''(lion. \\'lu n till' hanking system of the country was 
not so well organi/ed as at present the charge for making 
eollcctions of local checks was so heavy that the creditors 
iVcfiucntly refused to take local checks. Tiider tlii'se 
circumstances the dchtor was ohliged to apj)lv to his 

Vll y 



» llKjlj< 


' ^^B^^^9 



.M(A1',\ AM) 1{ \\KIN(; 

h;inl< I'or a dial't wliifli would lie acccptulthj in the city 
\\1r re liic amount was |)ayal)l(.'. 

The ('act that New V'oiU is the coninK-rcial and finan- 
cial ccntci- i)f' the I'nitcd States and that hnsincss men in 
evei'v city and town are likely to liave tinancial relations 
uith that city, citlier purchasing- ^-oods from it or sellin<r 
^•oods to it. has made it a(hisahle i'or hanks throughout 
the country to maintain deposits in hanks of that city. 
'J'hus it happens that there are always ])ayments to he 
made in New \'ork hy merchants huyin^ there and pay- 
.uents to he made IVom that city hy merchants selling- 

IK). Exchange ())i Xnc Yorlc. — "Without '' ^ use of 
exchani^e it wouhl he necessary t(^ pay for every shiji- 
nient of froods l)y forwarding cash and to receive pay- 
ment for every c()rKsi<4nment hy transporting cash in the 
()j)l)osite direction. With the use of credit the ship})er 
in the inland town receives ])aynient for his eonsio-nment 
hv either drawing- a draft uj)on the consi^-nee or uwait- 
ini'- the receipt of a draft upon a New ^'ork hank. 
Kither of these instruments lie (le])osits in his local 
hank which forwards it to New Voi'k and receives a 
credit there u])on the hooks of the hank against which 
it ^vas drawn. The bank has then the ri^ht to receive 
a certain sum of money in New Tork and can realize 
upon this ri^ht either hy recjuesting the shipment of cash 
or hy drawing a draft against it. 

Merchants who have made purchases from New York 
must pro\ ide a means of payment in New Vork when 
the l)ills are Ciwc. The local hanks having deposits in 
New Vork are (julte willing to sell orders upon the New 
York hank. Thus hv means of buying and selling the 
right tf) sums of money in New Vork the payments 

Do.Mi^ric ANP lOKi'.KJN !:x( n.\\(,!; iir, 

wliicli arc iicccssitatid l)\- tiif iiion I'lmnt n|' ooods in ami 
Dill arr made. 

I U. Ilo'a' llif hdiiLs htdidlc A'( Ti.' }''//•/.■ i\r( lifin^^r. — 
.\(\v ^'()^k cxcliaiiLiC or ordir.s ii|)()ii deposits in New 
^ iii-k hanks arc accri)tal)lr ex cryw lici't : in the first 'acv, 
lircTuise tlierc ai"e so nsany persons \\ ishiii<4' to make pay- 
iiK iits in that city, and in the second ])Iace hecausc every 
h;inkin<if institntion in the conntry deals either directly 
r indirectlv witli some New Vork hank. 


How tlic local hank^ oil fliiir powir to ■-fll drafts on \cw 
^ mk can hc^t l)f shown l)y a (■(incntf illu^t raf Ion. We will 
Mi[i|)n>L' that a hank in Auroi'a. Illinois, has on ({(.'posit ^1(),()()() 
\ufh till' l-'irst National of Chica^i). Let ns su|)[)()se that an 
Aurora niannfactun r has sold stoves to an (a--ti'rn dealer and 
ia^ reiH'Ivi'd in payment a check for ."^l,!)!!!) on the Corn K\- 
< hange hank of New Vork. He will deposit this clieck in his 
.Vuroni hank, uhlch will send it to its Chicairo c'orre-.pondent, 
iiid therehy increase its credit halance to S] l.OOO. Thv ('hica<^-() 
i'liik will send tlu- check to its correspoiid( nt in Ne« Vork, and 
n increase its ciedit halance in New Wnk hv ^1.000. Bv an 
inanu'enient with the l-'ir.' t National Hank of Chic/i^'o the 
Auroi-a l);ink i> ahK' to sell drafts on the Coi'n I'Achanere of 
\i\\ Vork. u-in^- for the purpose hiank draft^ furnished hv the 
r!i--t National. It is (|uite possihie that on the same dav a 
;iierchant in .\nrora, who has hou^ht oi)i)(Js from New Vork, 
'ill call upon the .\urora hank for a draft on \cw Vork. Ho 

ly not want a draft for exai'tly ."^l.OOO. hnt that does not mat- 
' r. The Aurora hank is ahle to sell hini a draft to anv amount 
up to .*i<l 1.000. for its credit halance in the f"hicajj,'o hank i^lxis 
it a rlf^'ht to "draw"" upon Ni w \'ork for that anioiuit. Thus, 
• n account of New York"> trade relations with all })arts of the 
■■"iiilrv. hank> e\ er_\ \\ here are u-ually ahle to sell drafts on that: 
I ;tv without helna' comi)elled to ^hip currencv. 

New Vork exchan^'e is u--ed not only for payments hetween 



New ^ Mik :r.\i\ ()tli( r p.irt- ot' tlir couiilrv hut aNo for pavimiiK 
lictwirii point- in the ruilid Stales outsi(!c of N.u NOrk. A 
iiiJUi livinj^- in Hiill'alo who owes .<1. ()()() to a man in New Or- 
li'jins can hot pav t hr dc ht hv remittin>>- ;i (h'aft on New York 
Citv. 'I'his mrthoil is t!ic one usualiv cniploved, for Buffalo 
hunks inaintiin no liakuu'cs in New Orleans, and so cannot sell 
(liMfts on that citv. 'J'hey can, however, si'll a (h'aft on New 
\'ork, anil that will Usuallv he accepted hy New Orleans hanks 
at par. Wluii the n.aler takes into account that New \'oik 
diecks and drafts are e\ery day l)eln<f used in this way for the 
cj.ncellation ot' (Mils in all parts of the United States, Ik will 
iiiuK Island why N,'w \'ork exchange is deservedly called the 
'"husiness nirufs inonev."' ' 

14-2. Stilli incut (if (iccoinits ])cfzccni hauh-s.-AVhWc 
ill tlie lono- iMHi \]iv iiK.vtineiit of ooods from New York 
and to \( \\ Vnvk iiiiist ])i-;icti('ally halancr, yet it would 
!)(.' a rare cnim-idctift' if l!ic foiimiodities sent from any 
given locality to X-w \()rk txactly balance the goods 
reeei\c(l froni that cit}'. Any ))avtieiila-,- hank, there- 
fore, lias occasion tr< purchase iiio'-c Xc\v \'oi'k exchange 
than it needs to sell, or it has a demand for more than 
it has occasion to buy or receive on depcwit from its cus- 
tomers. CnlesK the country haid-c wishes to shift its 
deposit account i'rom a \e\v York ])ank to some c>lier 
1/ank it will be ncctssuiy to make a shipment of 

In case a country ])ank has a dej)osit with its Xew 
York corresjiondcnt mIucIi it considers lar<>'e enouoJ! it 
will accept dejxjsits of checks on New ^'()T•k only uitli 
the intention of makino- slii]>merds oi' cash to reimliurse 
itself for the sums jiaid out. The shijjmerit of currencv 
involves expense and it i^ (pn'te likely that it Mill not 
acce]n suj)LJ!un)us TNtw "I'ork exclian^e uiiiess it re- 

1 Ji 


and ('uiTi'iUA'," pp. 7;»-bO. 



c.ivcs a i'vv which will cover the cost of coUcctiiio- the 
same in cash. 'I his cost ,lej)e[uls upon three items: first 
il;< ( xpress charge, second insurance, and third the loss 
if intefcst. The chai-^^'c for trans])()i'tation is usually 
(Minliiii((l with the chai\u'e I'or insurance hy the expi'css 
(iiiiipany. 'I'he moment the \c\v 'S'oi'k hank delivei-s 
ll:i' cash to the express company for shi|)ment to the 
(Mimtry hank upon its order it ceases to pay interest 
iilMiii that sum. The counti-y ])ank therel'ore loses the 
interest upon the same until it receives it and uses it as 
a hasis for interest })aying loans. 

II.'}. Cosl of ciirrrnc// slii/Jnwiit.s. — The cost of cur- 
i' iiry shipments l)etween New \'ork and Chicago is in 
the neighborhood of .50 cents |)er thousand dollars; be- 
i\\een St. Louis and Xew York it is (>() cents; between 
New- Orleans and New York it is 75 cents, and between 
San l-'i-ancisco and Xew York it is .$1..50. 

\H. St'ftUmcnts through the stih-trcasurics. — The 
r »st of shipping currency from one city to the other is 
tVe(]uently saved to the banks by the Treasury Depart- 
I'lc ul of the Government. For a good many years pay- 
ments to be made between the Treasury at \Vashington 
and the sub-treasuries in the various large cities were 
all conducted by casb shipments. It happened \ ei-y fre- 
quently that at the same time that the treasury was for- 
warding consideral)le sums of cash between two cities, 
the banks would be shipping currency in the ()p])()site 
direction. An ingenious cashier in Xew Orleans early 
in the seventies suggested to the Secretary of the Treas- 
ury, McCullough, that a saving both to the Government 
:iMil the banks might be effected if the banks when they 

WKjlcil to tr.'U!S!l!!t !>>.f!!l!'\' to ;• clfv !!! \vl>.!''!! !! mib- 

treasury was located would asct-rtain whether the Gov- 
ernment at tlic same time did not w ish to send monev in 





the opposite directioi!. IT this pro\t(l to he the case it 
wo'ild he j)rofitahl(' to the hanks and to thi' (ioverninent 
to allow the hanks to deposit tlif inohty in the Treasurv 
and reeei\e an onkr iii)on the 'J'reasniy in the other eitw 
The Treasury otliee in the first city would receive the 
currency it iv(|uire(l iVoni the de])()sitin^' hank and th" 
hank in the otlici' city would recei\i' tlu' eurrencv tVoni 
the 'I'l-casury instead of tVoin its cori'cspondcnt and ^ll 
cost of transjjortinn' the money would he eliuiinated. 

14"). Utile t)f A'ci.' l'n/7.' cxv)iiin^c, — Suppose tliere 
was a <4rr:it deinan^' for Xew ^'ork exchange in any 
city on account of the hea\y hills of iiierchan(hse faliiiiu' 
(hie at some pai'tieidar season of the yiar. 'I'hc hanks 
will diseo\er that the demand for Xew ^'ol•k exehanm' 
far cM'ceds the supply of checks and draffs deposited 
hy customers. 'I'heir di posits with their Xew N'ork cor- 
respondents are reduced and in order to continue sell- 
in,t4' Xew ^'ork exchanu'e thty must ship currency to 
that city. In that ease Ihey will he justilied in cliar^- 
in^' at least .')() e( nts pi-emium for every $1, ()()() 
ol Xew N oik exehanue sold in ordei' to i-eimhni'sc 
themseKc'- for the actual cost. Competitiou hetwcen 
the local hanks will not permit a much liinher chai'^e 
than this. 

On the otiiei- hand if tlu rtciipis <d' Xew ^'ork ex- 
chaniic cxeicd the deii and for it, on account of hca\\' 
shipments of ^i.-iin or produce to the chief exportiiiu 
city ol' the country, the hanks will find their deposits in 
Xe\s ^'oi'k la rijtr than they cai-e to mainl.iin. 'I'lic\ 
will he I'orced to oi(l( r shipnit nts of currrnc\ to them. 
To reiudMu-sc lhems( i\(s foi' 'he expense !|i( \- will suh- 
lr;ict fiom the f.icc \;ilue of the exchange hou^ht tif 
i ;-;•;-;■.;; i ;:;; ;;; j ;; ;si ; . Tiii (lisi tiT (iOiiij^ liic iitoiiicSS. 

'I'lius it IS po>>ih|e i'nr (Avli.uiac on X( w ^'ol•k in San 



I'ratu'isco to he sold at a preniiuni of $1.50 or to be 
(.■H'eied at a (liscoiint of the same amount. 

14(;. S'ifj;nijic(im'c of ndcs of domestic twchdugc. — 
'i'hc premium or diseount on domestic exehan^e is ])uh- 
lished ill the pririeii)al dailies and is nseful to the husi- 
iii'ss nuui as indicating- the volnme and dii-ection of trade 
;it any ])articular time. An unusually hi^h premium on 
New York exchan<^e or an unusually j)i'()lon^e(l ])re- 
inium will indicate that the purchases of local merchants 
lias hcxti unusually heavy in that year if tlure are no 
unusual transactions to affect the; prit-e of exchange. 

Why does it not happen that under certain circum- 
stances a communitv mav huv moiv aoods than it sells 
during' any ])articular period and thus he forced to j)art 
with all of its currency in settling the halance:' Since 
* ach trader is simply looking out i'or his own private 
jM-ofit and does not concern iiimself with tl;e (piestion 
of the amount of currency there seems to he no reason 
uliy a comnumity might ji(»t he drained of its currency. 
This hrings uj) the cjuestion of the halance of trade, the 
jMineijjles of which arc the same whether thi' exchange 
of goods is l)etween two sej)arate nations or hetween two 
localities within the same nation. 

Su])pose foi" any reason that there should he an un- 
usuallx hea\ y puichasing of goods hy the merchants of 
;i western State in any ])ai'ticidar year. The merchants 
would huy from the hanks N'lw N'ork exchange with 
which to j)ay their hills. The lianks. ai'lei' lia'.ing ex- 
liausted their credits in \ew ^'oI■k would hi oI)ligcd to 
hip currency in oi'der to co\er the drafts on New 
^ lu k sold [,, tin merchants. 



I rii'i'i' I*, till t* 'iii\ iriitii-«ii' (li!i) •! «w till) 1 1 1 1 II it I' It ill ill >.. t 1*1 1 \i It •! I 

A \\^ nuMu V or 'm--Ii a^ m rcNiiH of Its |Mir<'lwi''(N nl' intods f'roiM 




otiicr rommnnitli-. No matin- li,,u fnrlv Cliit'Ho-,, aiul llio 
coniilrv tnl:iit;u-\ to it iiia;, puirliaM' o(wi,is from lli<-' K.i^l. 
thoM J)^ll•(•|l,■|s(^ can iir\t-r mak<' aiiv xTJous drain upon the ca^! 
supply of Chicago. N,, matter hou rxtravaoant the jicople of 
the Wot may he, tlirii' puivhiisis of ca4rn, ^ood-, can nc\(>r 
In ^ivatlv in cxccvs of tlicir salo to eastern customers. Sliould 
I 111' people of Chicago for ( \l raordinarv reaM)ns at anv time in 
• TcaM' their )) from N. w York and other eastern cities, 
the Iir4 etfVct in Chica^io uonid he an increase in tl:e demand for 
Neu York exchange and in l»aiik sliiprneiits of currency fro 


Chiea-o to Neu York. Tlie loss of currency in Cliican-o, Miice 
it N^ouid rrduc, the len.lin- pouir of Chica-o hanks. «o„ld tend 
to eausc a ri^e in the rate of inter, st and a ri~i in the \ahie ,d' 

money. 'I'he pi-uvs of certain co ditie. uculd he-in to de- 

•■''"•■- ""' "'■■■'I' i'<Mnmo.hli.-. l,u| „f those wlieh are suh.ieels of 
sp.rulition. such as s|,,cks. uh,,,l. •■orii and pm'k. .M,,st of the 
-peeidatnrs in tliesc .articles are horrouers. and the int.'resf tliev 
pa\ Is an impurtant item in the expenses of their l)Usiness. so 

'''•■'' "I"" 'I''' llll'>esi rate ris. s the\ are uhli;;ed lo ..mtra.'t 
""''■ ••[•"•■'''■"I-- Chi.'a-o uonld ihws lieconie a o(„.d place to 
I' 11(1 ui .■■lid als,, I nnod place in vJiich lo luiy stocks .ami i)onds, 
uheat. ,11.1 nth, r spcculativ,' coimiiodit i, >. In ,,th,'r vv(,rds. li,,. 
valu, of m,,ii, \ uould lis,, in Chi.,,-.,, an. I p...p|,. m p .rts 
"*' "" <'"iiiitry «,m!d iiier.asi' th, ir |.urcliasc.s in, |,,,ar- 
k.ts. r.milliT'n' Neu ^■.,|■k .\.'han,-v in Th.' r.ader 
must 11,1 suppose th.ii,. chane.s in pn.v ,m- in the rate ,d' 
intuLst 1 ,.l h,. so -r, ;d ..s lo.diract ;;cn. rai attent N. \.r- 
Ihek'ss it cum.. I h. .i..uht,.| Ih.d such chaiio-. s d,, i,,k, |,|ace. and 
that as a r.sult the sales ,,f ( hica-o to other parts ,,f I h. nnui 
''■.^ •"' ~" ••"i.liisl,.! that in III,. loiiM rt.n t|i,_\ furnish .i supply of 
New York fxchaii^i' e(|U.i| to tl . .1, muid. 

'I'hus ;i |,;,pp,ns throuuhoul fho country lliat in the .-..urs. 
ot .a \, ar the d. hts nf Iv. ry coniiuuuify .tr.' always practicajh 
lialaiiced l)_v its cndits .ni a. count of sal.s. .,. tint l.irM.. ship 
III. ?its nf -Tri'iicv are iieyer neressnry. In.i, . .k it' .,,,.• M,,,..,f. ■!.•.. 
•uid li inkiii;^ svst..nis w. r. p. i f. .1. m, shipm, nt .,t cm.t, iicy from 



mil- part (if the louiitiy to anotlur would Lver occur a> a ucccs- 
•arv result of trade transactions. .Money or currency would 
(iiily he .shipped to a connnunity as a result of an increasino- netd 
\'iU- it as a medium of exchange or as a hasis for the expansion 
1 ! hank credits. In Canada, for examj)le. on account of the 
elasticity ol' its hank note circulation, >easonal variations in the 
(It iiiand for currency are easily proxided for by the local hanks 

I ^ 

.1 tl 

U'U' Uranches. 

. 1 

I'T. 2'Iic clctiri;'^- liousc prinriph'. — Doiin.'stic ex- 
change as we luive seen, is simply a hanking deviee to 
avoid the iinneeessarv sliipnient of nionev 1)V settlinijr hal- 
.ihces only. The |)rinei;)le is e.xaetly the same as that 
DM whieh elearing houses are based. The hanks in any 
diK' eity find at the end of the ihiy that they have re- 
(•(ixed from their depositors a great numhir of eheeks 
rawn on neighhor'ng l)anks. Hefore the days of the 
'raring house eaeh hank sent a messenger to all the 
.iiers with the items against tliem and reeeived the easli 
ill |)ayment. At the same time that each of the banks 
\\(i'e seiKhng out messengers to make eolLetions tlu'V 
wvvv |)aying eash ovei' tlu' eountcr to the messengers 
ol other i)anks in settii'ment of the checks aiiainst them. 
l>y ha\ing a common place of mtcting tlu' mi'ssengers 
"Mild deliver the items to the debtor banks and could 
irii\c the checks lepresenting tlii' credits i,\\\v them all 
il OIK' time and could easily figure up the diircrcnce be- 
lu( ( II the (kbits and the credits. .Settlement could then 
'- made by payments representing the dill'iicnces which 
"ere likely to be less than 10 per I'cnl of the total trans- 
:!■ lion, tliiis '^.-ning the IsMMdling of '.»() per Cent ■)(' the 
cash represented by the checks handled. 

The dealing house |»iiiieiple no! yel been appli«'d 



IS lullcs. ,\tt nf in th( setlliiju- of aci'ount' 




iliMiii. " .Mi(ii(\ Mihi ( iirriiuN, 

s i sv. 



banks in different localities. The forwarding of the 
cheeks to a central point, together with other difficulties 
which will he discussed later, has up to this time made 
the establishment of a clearing institution for out of 
town collections an impossibility. The same result, 
however, is accomplished by the custom of country 
banks keeping balances in the city banks and drawing 
against such accounts instead of shipping currency. 

148. Si'tflin<^- hdUiucts h/j usf of (77yZ/7. Methods 
have been found for eliminating tiie shipment of cur- 
rency, even in order to pay balances. IJanks whicii be- 
come debtors to others through the settlement ol' 
accounts may I)orrow the balance due from tjie creditor 
bank and i)ay interest thereon. 'I^iis of course is : )t a 
final settlement of (he balance, but simj)ly postpones the 
.settlement, yet if in the near future the balance happens 
to iim in the op|)osite direction the loan may be li(|ui- 
dated by a credit balance instead of by the p.iyment of 

1 !■!). (iohJ the infrnidfidna! medium. In the case of 
domestic exchange ultimate payments may be made iti 
any form of cm rency but in tiie settlement of balances 
between dilferent nations gold is the only acceptable 
mediiun. .Since m,)|,j is tlu- ultimate basis of credit in 
all civilized eiiiintries, and since a \olumi' of cin'renev 
from SIX to t(n times its amount is erecttd u|)on it. the 
niovmients of noj,! fnmi mw pl;iee to another are of 
\astly more impoitance than mo.rnienis of any other 
form of cash. Ivxports and imports o| o,)|,l in and out 
of a country are likely to disturb the money situation ;in(i 
to P(C(ssitate lVe(|uent readjustments of eredi! eondi- 
tions at new rates of interest. The movements of gold 
i<'it i^^ii ixeiiaiiL'e opv laiioiis. and il is 

«i I \_ lilt t t -^ 1 1 I t t f r 


this fact which causes hiisiness men to scrutinize so 
carefully daily ijuotations for foreign exchange. 

1.50. Finiction of ihc dealer in foreign exehange. — 
'I'he service to the business coniinunity of the interna- 
tional hanker who deals in foreign exchange is not only 
that he does away with over 90 per cent of the shipments 
of gold which would otherwise he necessary, and thus 
causes a great saving of expense and risk in settling 
commercial transactions, hut of far greater imi)ortance 
is the service that h( renders in steadying the credit con- 
ditions the world over. His function is more than to 
eliminate the shipment- of money l)ack and forth to 
make payments -he still further decreases such shi})- 
mcnts hy borrowing and lending in foreign markets, 
so that the final and a])solutely necessary shipments of 
gold are retluced to a very low minimum as com})ared 
to the total amouJit of Inisiness transacted. 

l.")l. KA'dinple of foreifxn e.vehan^e. — Let us take a 
tvj)ical case in foi'cign commerce and show how the in- 
ternational banker facilitates the transaction. Armour 
vV Company receive an order frun; a liritish dealer in 
Cleats for a shipment of beef. After the beef has been 
loaded on the cars Armour \ Company draw a draft on 
!he Knglish consignee which in effect reciuests him to 
pay to the Chicago National Hank or anybody else 
disiunaled bv them, the sum (d" 1: 1.000 sterling. 
Armour \ Comi)any might have waited until the 
l''.nglish customi-r had received the meat and remitted 
to them a ciicck which .\rmo>ir \ Company could have 
collected Ihrough theii' bank. If this u ( rt Ihc I'Ustom 
Armour \; Com|)any would be iiciuiicd to tie uj) an 
rnormous amount of capital in this export business. It 
IS the aliiiosi universal itruclice of British business men. 





lunvevcr, to draw upon tiicir customers for the amount 
of o(,n,ls sold as soon as tlicy are shipped and the 
American exporters find this very advantageous because 
they can reahze the proceeds of a sale of goods very 
i|uickly and it reheves them from the necessity of b(/r- 
rowing so mucli working capital. 

The Chicago National Hank is wiUing to purcliase 
or give crefht to Armour .^ Comj)any for the (h-aft im- 
me(h"ately. aUhough it cannot reimh'urse itself for sev- 
eral weeks uidess it sells the draft outright to another 
hank, in which case it simj)ly shifts the hurden to the 
other !)ank. It is the business of a hank to provide com- 
merce with working capital for a consideration; in tiiis 
ease the consideration comes to them in the form of a 
discount which they deduct from the face of the (h-aft 
in jjurchasing from Armour.^ Company. 

l.VJ. nini haiihir.s arc tf//////- /o purchase foreign 
(Jrafts.~Thv hankers arc willing to purchase the draft, 
even though they have never lu^ard of the Knglish firm 
on whom it is drawn, for the following reasons: (1) 
The reputation of Armour \ Compai.v assures them 
tiiat the (Ira It would not he drawn utd"ess a shipment 
of merchandise had been made. (•_>) Armour .V c"om- 
pany as drawers of the dralt under the universal law 
"I" negotiable instruments, endorse the payment of the 
s:ime and may be held for payment if" the Knglish 
drawe( fails to accept it. (.'}) "in most cases there is 
attached to the draft a negotiable bill „f lading which 
vests the right to receive the goods in the jxissessor of 
""' '"II <•'■ lading. 'I'hr Knglish bank to whom thev 
l)avc assigned the draft will n,,t deliver th- bill of 
huhng until the consignee has accepted or paid the 

til ai t. 

( f ) 

lo still lurfher guarantee the !)ank.s 
•.igani->t loss there is attached to the draft beside the bill 



(»r ladiiio- an insurance policy which entitles the banker 
o receive reimbursement if the consionment should be 

damaged or lost in transit. There 

may also be attached 

to the draft certificates of Government inspection certi- 
lyino- the (juality of the meat and also an inxoice of the 

hy,i. Progress of draft.— These safeguards arc so 
-ifective in ouaranteeino- ])aynicnt of tiie draft that it 
is extremely rare that even a (hspute occurs in trans- 
actions of this kind. The Chicao-o National Hank, if 
it has no corres})ondent in Enoland. may sell the draft 
in Xew Yiu-k. The Xcw Ynvk bank w ill send the (h-aft 
to England for collection and credit the same to its ac- 
count. New Vork banks are always willing to j)urchasc 
these foreign drafts and to create credits abroad in 
Older to be in a jjosition to sell foreign exchange to 
importers and oth.ers who are re(im'red to make pay- 
ments abroad. The foreign trade of this country "is 
so huge that there is always a demand as well as a suj)- 
ply (d" foreign exchange. The international l)atiker who 
(le;ds in it is exactly like a merchant who buys and sells 
any commodity. 

1.54. Quotations for foreign ear h a nge. —The (juota- 
lions for sterling exchange are the prices at which the 
light to receive certain sums in England is bought and 
^nid in Xfw ^'„,•k and varies like everything else ac- 
"ifding to demand and supply. 

1.).'). The pound sterling.- The monetary und of 
I'.ngland is the pound sterling, which cont;iins IJ.'J 
-lains of pun gold. Sincr dui' monetary luiii is the 
•i"llar. com|)OM'(l of •_'.'{.•_'•_> grains of gold, it is easv to 
'■alculate that the English soxcrdgn. uhich is the name 
if the coin containing a pound stei ling, is exactly e<|uiv- 
ilcnt to $f.S<;(i.*). In otjk-r worus an Knglish sov<'reign 


:i ' mv.nm t 


l^() M()M:V AM) ILWKlNCi 

c'Uii he iaUcii to a rnited Stales mint and rccointd into 
1.8«Wi.) AiiRiican <4'ol(l dollai.s. 

Tlicrc is a «ri-eat difrcrcncc. however, between the 
li^dit to receive gold sovereigiis in Knghind and the 
})()ss( ssion of gold sovereigns in the L'njted States. 
A gold sovereign in England will not pay a debt in 
America unless it is first imported into this country and 
coined into legal tender. Therel'ore it is worth to its 
American owner .$4.8(;(>.), less the cost oC bringing it to 
this countrv, mdess he c-an re.ijize n|)on it ])v sellinu' the 
right to receive it in Kngland to some one who wishes 
to use it there. 

l.'if). Cost of Shipjlimr <roI(}. The cost of sllipjjilirr nohl 

across the Atlantic varies sli^rlitly from time to time, 'i'hc fol- 
lowing; fin-uits. showintr the cost of -hippinn- .>;1, {)()().()()() 1,, u-,,l,| 
from New York to London weie furnished hv the repriseiitat ive 
of one of the largest New York bankiiio' houses: 

ln\(>tcd in fine I)ars, L':5.;2f^O,OflO pfr $1,()()(),0()0 

A.s.->ay office premiinn on l)ar-- 1 c(iit> per SKIO. . . . }■()() 

Freiojit rj '.i^> per c. nt l.r)()2.50 

Insuranci' 1 Hi p, r cent (J^o 

Packing an<l cartage 70 


The Hank of I'',n<rlan(rs price of n-,,|d variis TTs. !)' il. to 
77s. lOljd. p, r ounce, I-liiglish standard. DHi-':; (inc. The 
mint coins an ounce of ^old. Ilngli^h standard, into 77s. 10 1 .,d. ; 
but the H;nik (d' laiyland, with ulileh il is the cu'-toni of the 
l)ullion l)rokrr> to dtal, usuallv pav> a fraction less than this 
sum, thus savin;;- its( If from lo^- of int. rc^t while the huilion is 
being cointd. It i- assumed b.low that tiie pays 77s. lOd. 

i :■-•-' -^ , 

4H,;J7r) oz. fine eipial .■)L',77^.7 o/. 91 (i U •^ fine. 



n2,772.T oz. at 77s. lOd t;,'2().')J57 i 

Deduct Muidrv rxpoiises 4, 

Not receipts in I,oiuloii £^205,370 

Cost of soverei-rn ( 1 .()()J2,()7r)..') -;- «();),;J7()) $4.88^2 

-Mint j)ar in the I'liited States 4.8665 

Cost of sliipineiit jk r sovi reifrn .45 .0157 

No loss of interest is included in the fore<^oin<^. 'I'he New 
\nrk l)anker uho furnished the finiires In Id thai no sucli item 
«as iiiv<)ivi(i, for he >old sterhn^- e\chan;4e as soon as he made 
-hipment and so was never out his money in consecjuence. If wo 
nil hide interest, we raise the cost of shipnuiit to .'i^.()li)7 per sov- 
t reign. ^ 

157. The minimum ^old point for sterling exchange. 
— Calculating*- the total cost of shipping (rold between 
America and Kurope at the lowest fionre oi" two cents 
pd- pound sterlino-, it is easy to understand why .$4.8405 
is called the niininnnn gold j)oint for foreign exchano-e. 
If there should he an extraordinary supply of foreign 
Inlls I'or sale their price under normal conditions could 
never go far below this figure because there would al- 
ways be some international banker who would be wilHng 
til pay for them the moment there was a?iy profit in 
Inlying them, for the purjwse of importing the gold, 
iiit.r they had l)een cashed in England. This mini- 
mum price does not mean that the value of forciirn bills 
is an exception to the law of supply and demand, but 
that when the price falls below a certain minimur 1 there 
arises automatically an u?ilimited demand. 

i.>o. x^i <i.t <• /7i ,<• ;7f" ,i;i7i(7 jj'iiiii /()/ fiiiriin^ CiVc/iange, — 

' Johnson, " Moiicv anil Currencv." 


M()M:V AM) i{.\NKI\(; 


On tlic olluT IkukI the price of sterlino- bills may not 
rise iiliove Sl-.HSC),; nndcr normal conditions 'cause at 
that ti<y\irv there is always an unlimited supply, so that 
no one who wishes to buy need pay any more. The 
reason for tiiis unlimited supply is this: The interna- 
tional hanivers, seeing- a chance for profit, will sell 
forei^i) exchange above the maximum n()ld point 
whether or not they iiave a credit balance ahroad. 
Lackino- such a balance, they buy ^'old with the proceeds 
of the bills. As soon as they have been issued they ex- 
})ort o-old to Kuroj)e so that it will arrive at the same 
tim the bills are presented for j)ayment, thus closin<f 
the transaction as far as the issuer of the bills is con- 

1.5!). irii// sfcrliiiii- i\ir}ian<^c fiuii/ fall hclozc ^i.HiCyr^. 
— We have seen that theoretically the price of demand 
sterlin^r cannot fall much below !i<i.84t;.3 because of the 
great demand on the j)art of the haid<ers when it tends 
to fall l)elow. There are conditions, however, under 
which the price may fall considerahly lower without call- 
ing- into existence this demand. In March, 1907, the 
price fell to $4.8.3 for a time, and in the autumn it fell 
still lower. There were several reasons for this. 

( 1 ) The rate for call loans in New York was very 
high and the bankers who would otherwise have pur- 
chased the exchange did not do so because it was more 
l)rotitahle to loan the money than to invest it in the 
exchange which would have tied it up for at least two 
weeks, the time recpiired to send tlie bills to London, 
exchange them for gold, and ship the gold to this 

(•2) The reluctance of the American bankers to with- 
draw gold from Kngland at a time when it was needed 
Uiere and when there was danger of a rise in the dis- 

i)().M!>r!( AM) roui.K-'^ !:\(!!.\\(;i: vv.) 

Miml rate il' tlic rf.sLive in iUv H:ink ol' Eiiglaiul were 
■ iidaiiyci't'd. 

(.•{) The (linieiilty in uetliiiL;' ^old for exi)()rl. Tlie 
ImIIs eould l)e j)aid in notes and altliouLiii the Hank id' 
r ii'dand must redeem all notes when asked to do so, 
'i\ las the I'i.ii'ht to ])a\- out coins of ks-, than lull wtinlii 
and make a (hffereneL- of a itiiI in the I' in t!ie protit of 
the exporter. 

(1) The hi^^h |)rie<.' of n'old hiihion in London. To 
,,\oid the loss incidental to shipping' coins, the at)i'asioii 
;ind the li;L;'lit weiuht, bars of ocjld must he pui'chased 
ill the market, (iold bullion is marketid in London as 
;i commodity hut with (ixed limits to lliictuation of price. 

(.)) The premium on currency in New ^'()rk in Xo- 
\ I'liiher. 1 1)07. (hie to the susj)ensioii ot" cash j)a\nients l)y 
'he hanks. 

!<;{). The gold iiKirhct.^-'Vhc hulk of the <y()\d \)Vi)- 
iliiced in the worhl conies IVom South Africa direct to 
London to the aiii'imit of ahout i^2..")()().()l)() per week, 
file hullion brokers meet on Mondays to liade. Some 
'if them lia\'(.' cei'tain amounts of bullion to dispose of" 
iithers lia\i' buying' orders. They beL>in by comparing- 
iMites and (juitt' a xai'iety of interestin<4' situations may 
f'e (hsclosed. Thei'e may be a big' amount to offer and 
a few small buyers, or vice versa. Sometimes the com- 
petition for the gold is \ ^ry keen. 

'i'lie Bank of iMigland is recjuired to pay on notes 
!or uold (to buy gold) at the rate of 77s \h\ |)er ounce 
'lid this fixes tlu minimum price. On the other hand, 
I'lc Hank Is under Kiiai obiii^atiiin to irdit-m its nolrs 
lor gold at the rate- of 77s 10' ._.d [)er ounce. This ap- 
iH-ars at first si^ht to hmit the srliinu' price, but on 
;i('coimt of the right of the Hank to pay out light w tight 
coins for the notes the maximum is raised to practically 



M()M,^■ \\l> HANKIVc; 

7Hs per ounce. Tiicrf is a tiu-it iiiKlcrstamliii^- that tlu 
]5aiik is lo liavc |)ixtV rcncc wluii il is willing- to pa\- the 
best i)ricv ollV red hy any other l)i(l(ler. 

The fact that the hank of Falkland must buy and sell 
all the ^old oilVred at the jjriees fixed hy hiw. makes it 
very ditlieult for Knnjand to hold her supply of ^old 
when other nations are hiddinu' hiuh for it \.< maintaiii- 
in^- hi^h interest rates. Kn-^iand for this reason is 
called a "fnc"" oold maikit. The Hank of Kim-land 
exercises control over the u'old su|)ply hy nianiijulatin^r 
the rate of discount: a rise in the I'ate dise()ura<res both 
foi-eiu'n and doiiustic borro\\in,L; not onl\ at the Hank 
but i I'om all othei- banks, which are I'oi-ced to follow the 
had of the Hank in the rate. 'I'his means of control 
is ef}'ecti\e. but it \y expcrsixc to tlii' business interests 
of the country, to whom the difference of 1 per cent 
in inteivst pa^inints mea)"s a ^ixat deal. 

ini. y^r////.' of France. Din'in^- l<)()7, the svstein of 
I'rance seems to have lurii s.ipei'ior: while there were 
strinoeiicics in all otlu r markets, while the rate of the 
liank of Kn<>land .\as held for a lonu- time at (» per cent, 
customers of the F,ank of France could always get i unds 
at W i)er cent. The Hank of France has a monopoly of 
note issue, but it is not compelled to redeem its notes in 
gold. \V'hen it desires to j)r()tect its gold reserve, the 
liank of France refuses to ])ay out gold in (juantities 
for export except at a premium. This ])rcmium is never 
so high that would-be exi)orters are induced to gather up 
th" outside gold at considerable ex])cnse. but it is liiLdi 
enough to discourage knding in foreign markets l)v 
l''rench capitalists without interfering with foreign 

Proximity of the <|uotatlons for demand sterling to 
le minimun. or maximum gold [joints indicates an ap- 


i)r)Mi:s'rir and iojir.K.x i-.xt iiANc.i; in 

iii(»;tfliiii^ r\|)(irt or iiii|)()ft (if ^old. Hjol! (luotations 
iiMlicalc exports, whik' low (|iioiations itidicutc iin])orts. 

!(■.•_'. (i(,l(l •v////>//'r/;/.v. SliijMiitnts of ^^old intn-f'ere 
with the basis of cirdit aii<l arc tlierct'orc can-fiilly 
watclicd I)y cvrryhody wliosf interest c'lii he afFected 
!'\- clian.i^ed coiuhtioris in the crecht market. The rate 
III' interest and especially the rate on eall loans is sonic- 
' lines ehanued (piite suddenly on this account. A stid- 
il<ii weakening- of the call loan rates is very likely to lead 
to a eallinu' of loans hased on secuiities as collateral 
■ ilii the result that stocks arc likely to j)e thrown on 
hi' market for sale, thus depressino- prices, ''"his ex- 
phiins the close relation hetween the foreijiifn exchange 
iiiai'ket and the st<ick CAchann-c. 

1<!.'}. Oiir forcif/n roiii !>icrci'.-~\\: is n well-known fact 
that aecordin,u- to the ollieial Hniires i>iven out at the 
C ustom House our ex])orts considerahly exceed our im- 
p'lts. The fi<rures for the fourteen years fading with 
l'.»i;{ appear as follows: 

>r\risTi(s oi' i()i!i;ic;x tkadk oi- imti;!) stapes.' 

■|"|'l^'' niniitli-. Total T.,*;.! i'.mvss of 

' Import-,. l'',\|)(>rts. I^lxports. 

'"" S sio.nn.isi .Si.iiOi.isn.os? i?,u),.)H.s!)8 

i'"'l S.':i.l7,M(i:> l.l>7.7(il.!)!)l (idl- :,!) ' S 'li 

'''•'-' !)(t;i.;i.'(i,!us i.;i«^i.7i<\i(ii V7s.:i')s,k->;5 

''"'•5 l.O-'.').'. I!'.-';'.T l.i.'O.l 1 1.(i7!) S'U.l-'J.U.' 

I'""- !>itl.():.r.;',71 1,M1().8.'7.J7I .Kiil.T;{!1.<>i)() 

''"•■"' I.117.)l:i.iiTI l.jl8..j(il.(i(i() 4(II.()IS„jli.> 

"""• 1. -'.'(;.:,():!.-' I J i.Ti:{.s(ii..,)()() .ooi.^dj.o.u 

I'"'' l.CH.lJl.i ?:> l.sso.s;, 1.078 U(i.iJi>,(i.->;j 

""'"' i.i!)i.:ui.7iij i,S(i(i.77:{.:iKi (iii(i.i;ii. .•.:!. 

!'"»!> i.::ii/).>i)..'n i.(i(i:}.()i 1,1(11. :v>i.()!)(i.sHo 

'''"' 1..),>7.HI!).<)SS 1.7U.i)Si.7.'() IS7.1(il.7:i.' 

'''II l..').'7.Jjr,, ]■!.-, :.'.()1!).:{J(I.10>) ,),'\()<!lt 

'"I- l.ii.V{..'(it.!i:U :,:oi,3.'.',in<) .r,l.(i,-.7.l7,-, 

'"l'5,()(is,.':u J.lCj.sst.Uf) (i,i.\s7:i!(M.j 

These figures indicate that we are .selling a great deal 

!oie ihan w are i)uying from foreign countries and 

'III natural infeieiiee would he that we receive the hal- 

• mce due us from this trade in gold. This is far from 

1.12 iMOM-:'^' AM) RANKING 

l)tiii<4- the casf. Ill tlif vfjir 1!)()S onv cxfcss of i-xports 
Mas $(»«»<>.()()().()()(). \\ liilc our 'xccss iiiipdi'ts of Liold wwr 
$70,000, 000. In thcytar 100.) our fxct ss of ( \{>oit.> was 
S< I-OO.OOO.OOO while we aciually (Apnit.d S.'JU.Ooo.oud 
worth of uo!(L 'I'hc liuurrs for tlic ( -■ poi! and mip'oil 
of ^<i|(| \\iv cjnht I'cccii! ycai's ari' uixui hi'lM\\. '|"!;I> 
ciniil ycai' a\c'r;i,m' nl' iinp.iils is souk^'. hal hiulis r than 
in prc\ ions years. 

M(>\i',\ii:\ r oi (■.(»! I) ro wn i kom tiii'. r\"i!i:n -;r\ri:s 

I'v\ clvi' iM'inlli^ 'I'lital Tot.i! I''.\i( >^ i>t' (■'.m'css iif 

( nditij: .Iiiiii- J<i. Iin|)iirts. l'.\|ioil-.. liiiiiDrt--. l-'xports. 

I'lil.-) ,< .Vi.iiis.iiiii s !».V.!)|.(I.>1 .*;tS,!M,>.0(),i 

I'lKi <)(i,.'ji,ri« :is,;,7:!.;.!n i«,)7,'ii^.i.i'> 

I'lor m.Mo..M!> .".I.:!!)'!.! ;<( (i:{,i i i.o; s 

Ml IS ; .. I is.:!:t;.:i.'i 7.'.l;{.'.'t.'l 7.>.!in|. iu; 

l!li<) I l,<i(l{.!»sll !M..",:{l.sls U..).';.S.'() 

l!)lii j:t.:!:!'>.!> '•. I !s..-,(i:{..M ;, :.•).. '.';i.:il(i 

"111 ;:!.!. nt.iiit .'.'.i(»!).<i.>:{ .>l.()!>;,:i(io 

111!.' |s.;i,{ii..>(iii )T.:i>' .s s.;J<)l,s|s 

Kil. I ii\isihlt' iliiiis (if I'oriiiiii !i'(i(lf. ]\\vi\ thon^'h 
we do not n'ct paid lor our ( \ct ^^ of txpoiis in Ljiild, 
n< \ c!'!!)! less wi ai'c ])ai(l Im' tli< ui in sonic lorni oi- 
oilier. The tim.res ot' inip.H'ts .■tnd exports include only 
the noods wliicli p.'.ss throu'di the ( iistoni I louse. 
'riiei'c are many kinds of tr:i l^actiolls re*|iiirini4 |'ay- 
ni' Ills ol' iiione\ which are ne\ er it ported ;it the C'us- 
toiii House at all and \ii Ihtir eil'cct upon tli.' trad( 
halanei' is the same ;is nu rcli;indisc. In tli( last d; cadi 
tile capital of the worhl h,is hccome more ;ui<l iiioi'c 
niohilc ;is the I'acilitKs for lojininy and iiucslin^- in 
foil i^ii coiinlrics n.nlicd ;i lusher pti lection through 
tilt hank-, and stock ( \eli;inu(s. Knt;lainl has .always 
'lulled ;i \{'v\ hiri^'c amount of Aiiieric;in stocks ;nid 

ll{tll{lk._ l*«'l)l'«'k^;ilt^itlJl' llll^j'L^ll>li>tW 111 jtlll* lllill;i.jl*j«><.J 11 Ik. 

l)().Mi:sri( AM) lOKKicN i:\( ii.\N(.i: i;5;i 

s;ii(l lli;ii tlif l;ii-i4(.r |).ii't of llic (';ij>ii;il iisrd to i iislrucl. 
(lur railroads IkToiv ISSo Ik1oii<^(.(1 to Kii«4laiul. 
Aimrii-aii stciiritirs arr so fxttiisivfly dealt in on the 
London cNclian^uv that the closinu' (juotatioiis on the 
London |)ti((s I'or them at Ihe end of the day. uhieli 
coiiK'. dne to the difl'creiiee in lime, at the opening' of 
nwr own e\ehan;^es in tlii-^ e(inntry. Ii;!\e a!i itiij)ortant 
( tl'eet ni)on (|iiolations lieii.. 

1»;.*). M(i:'t. lilt Ills of cdjjildl. — In I'ceent years the well- 
known thrift of the l-"reneh people has induced our 
linaneiei's to make nnnsiial eH'orts to estahlisli a mai'ket 
for eel-tain American seeniitics in Paris. 'I'lie Pennsyl- 
\ania Hailroad Company sold a very larue is^ne of 
!:onds in that eonnti'\- and other lai'<.ti- coiuni'n^. notai)ly 
tile Lniied States SI til C'oi'poiation. ha\ c from time to 
,iiii(. heen eaii( il\- se-kinu Ih pri\ ije^c of listm<^' their 
,( cin'it it s on the I'aris l!our^e. 

'11; I 'nit((l .Staus 's jusl cominu' t . he a market for 
r(,r( ion si'cnrities. 'I'ne eliii f foreign secni'ity which is 
it |)rest lit (jiioted on our t xchanu'c is the Japanese war 
honds. I*oi-tions of bond issues of .South .\merican 
st.ites. .v.ueli as I'ciii and Chili, are occasionally rdlotted 
lo American hankers to he disposed of in this eounti'y. 

The moxcment of these securities to and fro is the 
inosl potent cause of Uuetuation in the for<i,nn exchaiiiie 
niarktt. .Stocks arc |)rohal>ly the first lliiuL, in the 
eountrv to feel the eireet of the tendiiiey to higher 
price-., cau^iil li\ an inei' .id amount of money or 
iredil. .\ \(i\ small rise .., die ipiotations of stfinities 
is ■.uilicit nl to cause i-onsideral)!< m lliuL; of thtni in this 
niarkcL which has a t( ndency to create a d( niand foi- 
foirigll e: 'iiiUi^^'e to |»a\ for them. Ih nee ;i ris( \\\ Ihe 

<• I . ■ 1 . .• ! 1 ■ 1 I 

j»l !(•(■ Of C Xiiliiii ^;i iiii i i i < \ j >< n i > > >i ^ m i .i i i 1 1 n u i ' ■ i. 

This expl.'iins wli\ an issm id' p.ipti' money can drive 

Mo.M'.V AN!) H.\.\KIN(i 

;in r(|ii;i] ;iiii(Hiiit of yold out of the couiilry s.) (|iiit'kly, 
fxc'ii hel'ori-' tlu' prices of coniinodilics li;i\c f'llt tlic 
(.•luiiii^T. Tlif iiioir highly (Kv(I(»|km1 tlif tiiiaiicial iii- 
stitiilioiis of tile world iln- uioi'c sciisitne will cvri'v 
country l)cc-onic to pricc-c iiaiiwiny inliucncfs. 

1 ;>«I. Interest (tnd (iividiutl j)(iifi)U'iit'{ to fdnl^ii .stoci,' 
hdidirs. — Auotlur item of trade uliicli atl'ccts the 
balance without appi'ariii^' in tlic Custom House figures 
is tlie iiitei'cst and di\ ideud payments made to the 
holders of American securities. 'I'hese payments are 
madi' in foreign exchr.nj^'c and ci'cale a dtiuand I'oi- it. 
hence tlicv ha\e a tendenc\- to lil't the i)riee of foreii'-n 
exchange away from the n()j(l import point. 

KI7. Freight. — Most of the merchandise which is 
moved to or tVom the I'nited States is cai-i'ied n. foreign 
ships. Since !H4<> the Americans ha\e found them- 
sehes at a disadx anlanc compared with Hnu'land and 
(Germany in the cariyiny- trade of the world and the 
result is that wt' must i)ay freight chai-i;es to foi'ei^n 
companies. These paymints ai'c made in forei<;M ex- 
I'hann-c and lu Ip to create a demand to oU'set the exces- 
si\f su|)ply of hills on the mar-Uet. 

IC.H. 'riui'e is still another ittin which does 
not appear in the olllcial tiyures. .Since I'anopenn 
travel has heeome so popidar there has aristn a lar^e 
(Kmaiid for letlii's of credit on tlu' |)art of tourists. 
The elfeel of tjiise Irtti rs of credit is to create a de- 
mand for liills. 

'I'hese four itrins. namely, secui'ities owned ahroad. 
iiit<i(st ;uid di\,(irnd |)aymiiits to the hohh rs llniiof. 
fi'i lyht I'lnri^cs to fore i,i4n ship owners, and iouiists' ex- 
penses in l*'ui'o|)( ill excels of |''urope;ni tra\(l in 

\ tiw.i.i/-;! 1.. ......._.... t !!,., ; ; i::!; ;: L.:,! ..»' •! ^ .,«' 

^ - 1 ii"- ; !*•- ct : \ j ,* ; "^ rjv : ; : ; : :; v : j i ; .' ". .1 ii i : i : ; i ; i i." ' i \\\ SS w i 

i)(jMi:s'ri(' AM) !'()Ui:i(..N kxciianc.k \So 

-i)()(ls we export ovci those wo receive fioiu foreign 

1G9. Foreign i\Vi'liaiiij,i' ntdrhtt. — IJelow are repro- 
(iiietions ol' a daily article on the foreign excliauge mar- 
ket from the ITdll Sircii Journal: 

[fVljiiiiiiv ^IL 1 !)()!). J 

'I'lic f'oreifTii fXciiHii^c iii.irkit opfind >irnn^', with (liiiiaiul 
-trrlinj^' l-.HlHiOQi 4.H7()">, up ♦en points from Saturday 's c'lo->i'. 
I'liiTc «us a o()()(l iiKiuirx for riinittancc, attnliiitcd to fonioii 
^1 lliiiir of stoi'ks luri'. and on account of the London sittknuiit. 

'I'hc market n maiiicd ^tron^" for tlic tir>t liourV tradiu"', in 
uiiich demand ^tcrlin<;- went to 4.S7().")(f^ i.S'iTO. Init it hccanio 
ividciit tiu'M tliat till re \\a^ not ^ulficient l)uyin<.'' })()\vcr .uid the 
market t llefeaf ter ^okl oil'. 'I'lie openitii;' >tren;4tli was iar^'iiv 
iiiHuencM'd l»v the weak opening" of the >tock markit and I.on- 
lion's salts of »toek> here uere eNulentlv o\ere>t nnatc d. Tiierc 
»vas soi'ic l)inino- ot" st( i-hnt;; calik > toi" the settlemiiit. 

Iv the aft( rnoon liiddlnii \\as nicatlv withdrawn and the mar- 
ket showt'd fui'thi r ea>e, cKi^in;^' ulth demand ^terhn;^- i'H~[.')(a] 
IHUTA), oil fifteen points i'roni the o])eniii^ and ott" (i\i^' ])oints 
iiM tlie day. 

[May ;k 1 !)();). I 

The foreifrn i\ehan^i' market open* d >leadv. witli demand 
-ti rhn^ kS* M)((' KM !■•'). unehan^iid t'rom I'rida vV t lo>e. 

I'he k'ir;4e ~hoil inlcrist which !■> said lo iai^I in ( Achano^c 
v>.i- t'iirth«r in i \ idi nee loda\. 'I"!ie coveiin^' moveiiMiit that 
s| irled in on Thiir-dax \\a-^ c<iiitimied uilh \iL4or diiriiiij; tin' 
-liort da\'^ >e^>ion <!■ iimikI -terlini^' ad\aneid (iflien points. U 
:ipp<ar> that a con^ideralik part ot the pii -.i nt iiio\ i im iit is ihie 
'" tiio iniinipid'it inn ot one in->tilntion. "hieh i^ thoiiolit to hi' 
"rij^j^in;^'" the market. 

The maikit clo>ed stroiiL!,- with deiii.ind sti-rlili;^ 4'.87.')5(«J 
t S7o<'i lip iiiieeii poiiii> on iiie iia\. 

^n>^l.^ and uankinc; 

|l iii:i|iilr<l l.\ I!( .l.ii'ir.ii \ ( ,.. I 
('mI)Ii-,. Drm.iiid. 

(>() (lav- 

, ., ,. . ■• ..,.1 ill,. ,)i, imys,. 

SIcThn- o|,,.n 1 >7i„.,a hT(i,i i s;i,i,,i >,;,, , >,,; „„a n, 'i 

''" '■'"^'•" I ^::o;a s:7.-i i s; ,,,,,i ^;„i, t s(i;!.i;.i sia, 

170. r:.fjilninili<ni of (oiirlcs. One purposr in n- 

l)rillti!|M thrsr ;:itic|c, is to ;ir. 1 1 1;| ! 1 1 1 llic s dticit with Hir 

iiH;iiiiti;4 dl" [\\v .l.nly Mioiuy ai'ticlcs. 

'•Tlif Inicion fxclKiii-v iiKirkd opoic-l iij) ivn points 
IVoMi S;itiii-(l;iy's close."" 

^ -^ i>"iiit iti foiri-n e\('li;iimr is I loo ,,1' one ccni. 
'I'lic ■Loiidoii scttlciiicnf iTlcis lo tl)c iMio'lish pi-;n- 
lic of sdtlino' stock cxcliaii^v i raiisiiclions fort. ■\a\y. 
'I'li.-it is to say. if a customer uix' s an onkr to a -aiikcr 
'" '"•>■ '"• "^'11 l'^' i> ii"i r.<|uiiv.l io ,kli\,,- or receive 
"'^' ^<'''"iii<^ unlil (lie next s.tilin- ,late. Because a 
L'l-cal many specnlators (iesir,- to close up their com- 
'"''"""•-^ '"I'-'l' 'lie s( tt|,,M,!,t ,|a!e there is like iv to l,v 
n.Msi.leral.le fo!vi-n I ra-hn^ jnst hefoiv set t k nien't tiiu.', 
11 ' i< foreiMiKix j|,.,\t. 1,^,,.,, |„|yi||„. our seciirilies f..r 
tenipoiaiy'al ion tluy ai likely to close up the 
track' hy sellinn. If t|„y l,;,^,, h.m "selling.' short they 
arc likely to pure liase s<cuiilies just hefore the settle- 
liu nt. 

Tiic oiKiiino sin n-lh was largely inlhienced hv the 
we; k op.niiiM of th. call iiiaiket aiid Li.ndoii sales ol 
>toek here were i \ id. nll_\ o\ crest iiii;i I ed."" 

'''"■ '^•"' ^ "I" Allien VII stocks hy L,) traders 
v.ould iialni.lly <rivcris. to a demand for e\eli;n,-e with 
^^'"'■'i '" '^" "!'• '.o\\.i piices in the .\( u N'.irk mark. I 
""'"''' iiidu.v for.iun s( llino' mid thus stiviiytlKn Mir 
fort i^n ( xchaiii^'- mark' I. 

"''"'■• ""^ '^"""' I'll} iii,u of sierliiiM cahles for the 
sett l( iiu lit." 
!- 1 / ■.,/./. . 

\ ...11 

credits l>_\ iiiiaiis of c.ihlc | 

• ii> .Ki.i liu I I iiils I ( I ( iK-e ()|^fs. Dealiis in 


i)()Mi.>'ric AM) roKi.Kiv i:x( n.\\(.i: i.;: 

ii:iiti(s wild liiid tli.'il llicy li.i\c a lialaricc aii'aiiisl tin m 

lust Iid'orc scttlciuciit tiiii'' in 1 don |ia\c not sullicicnl 

lime to hny otlui- Torrns of stcrlin^^' c\c'liani>c and send 
iliiiii l)y mail. In oi'der to meet tlieir ohli-^-utions in 
London they arc ol)linrd to provide Imids in the market 
at onee. 

■'A lai'oe short intei'est wliieh is said to exist In ex- 
( liani^e was further in evidence to-day." 

I'oiciwn exehanue is hoiiL-lii and sold s])ccuhiti\el> 
ill much the same way as stocks. If llic dealer hclicves 
Miat the ;)i-ice is uoino down in the near future because 
of the prosjx'cts of an unusual supply of hills or because 
"I' ai! unusually liyht demand he mav "sell short." 
That is he will contract to provide exehantic at a ^'iven 
price at a futin-e time. A short interest cxistijiy in 
lerlino- ix( hanue will have the same effect u|)on pi'iecs 
"f cxchanyc as the same (ondiMon existing- in stocks. 
.\ person who has sold slioit must ultimalely Iniy the 
i!iin!4 li^' has aL'i'cd to delixcr and this buxirm- or "cov- 
' riuii' by shorts is likeiy to sustain prices e\ en in the 
I ace of ad\ crse conditions. 

■"'riie coMiiiiM movement that started In 'I'hursday 
w as continued with \ i;>()r."" 

I'or some reason on this particular dale the shorts 
I'oneluded that prices wen nolno- hiulier and made all 
l^istc to purchase in onk i- to make dilivcri-s bcd'oif the 
limitations Went hii^liei- yet. 

It appears that a considerable |)art of the present 
■mveuient is due to t h« manipulation of one institution 
^^hieh IS thounhl to be i m^in^" the jjiarket. 

Here a^ain w < lind anothrr similarity Ixfween the 
market for fort iyu exchange and tjie stock market. 
r,\ehanu. is manipin ited hy ai'lilicialjy interferiiiL;- with 



ii<y and on'ei'iijn'. 'I'lie manipulator who de 



sii'ts to buy or st'll t'itlicr (Impresses or raises the inai'kt,t 
(luotalioiis by jjinrhascs and sales, tlic ohjccl hciii^i;' to 
inspire similar l)uyin^' or sclliny- on tlie part ol' peopji' 
who see priees ^'oin<4 up or down and wish to partiei- 
|)ate in the advance or decline, as the case may he. 

'I'he mani])ulalor is able to advance i)rices by pur- 
cliascs hut if he is unable to sell out het'ore the price 
has declined to its previous le\ el he makes nothing by 
the ti'ansaclion. 'I'he manipulator always expects that 
his selling w ill ha\"c a less effect on j)riccs than the buy- 
ing. Othei'wise he gains nothing in the transaction. 

17-. I'drhhis of fofi'i::,!! iwcIkui^c. — There are four 
diffeicnt varieties of stei'ling exchange ([uoted above. 
Cables we have already described as transfci's of credit 
which taki' plact' within an liour or two. 

Dtalci's who lia\e sold time drafts on London without 
ha\ing (h'posited ci'cdits there sometimes postpone the 
foi-warding of funds until the drafts ha\c reached 
maturity. They do this hojjing perhaps that the market 
V. ''1 decline befoic the maturity date and thus enable 
them to purchase exchangi' at a greater pi'otit. IIa\ ing 
waited so long without pui'chasing demand sterling they 
are obliged to go into the market for cables at the last 
moment. It will l)i' noticed that the price of cablis is 
twenty points abo\c the price i){' demand stei'ling. This 
dilfereiicc represents the cost ol' cable me^sagis and 
also the inteitsl for six or se\en days. Tf" (Kalei* who 
sells a demand draft knows that the funds cannot be 
called for in London until the draft has reached that 
city b\- mail, wjiieh at th<' very i»cst must r(i|iiirc at Icjist 
six days. Li the UKantime his London account is draw- 
ing interest. 

17'{. hchunid stcriiui!;. I)emand sterling repre- 
sents a draft which is payable on |)risentation and dc- 

■13^ , 

DO.MKSTK AM) l-()in'.I(,\ 1 .X( I F AN(,i: 


niiiid. It \\ill be noted tliat there is a difrereiiee ol' 

!i\( |)()ints between tbe (juotations at <)|)eniiijLi' 'i'i<l elos- 

ml;. This (hirereiiee is aeecMinted for by [\\c (hfferenee 

I, ijiiahty oi' the (h'al'ts in the mattei- ol' sienrity. 

Drafts (h"a\\n l)y the best known and most rchable in- 

- Iiitions eoniniand a sh-^htly hiyher pi'iet' than those 

^^:n■d by weaker fii'Mis. Hank (h'al'ts eonmiand hinhcr 

|iii(e than coniinereial (h'al'ts ueeonijjanied by bi'ls oi' 

lading- and other doennients. 'I'lie })riee of the nini ty 

(lay (h'at'ts is nearly 2 cents j)er ))onnd sterhn^n' kss 

tlian I'or demand drafts. This (hU'erenee is aeeounted 

Ini- by the fact that the jjurehaser of the (h'aft ninst wail 

ninety (hiys before lie can demand ])a\nient. 'I'he 2 

1 riits represents the interest j'or the ninety days. 

A j)oint mnst be noted here that is ot' ^reat import- 
anee in undei'standino' the nse of finance bills. The rate 
if interest which is to be subtracted from the (luotation 
luf demand sterlinn^- in order to oet the ecjnivaleiit foi- 
iMiiety days dral'ts is reckoned at the Kni^lish cnrnnt 
I lie of interest, e\ en if the ({notations are ^ivcn out in 
\< ' \'()rk. The reason for this is that the purchasers 
III the bills may send them at once to London and redis- 
I lint them tiiei-e at current rates of interest and if they 
liiiosr to realizi' on the funds may sell drmand sh rbnn' 
i: thi- market ])ricc. e\en before Ihey forward the nimt\ 
i..\ l)ills. 

ITk l'!itnlis]i hdiili'niL: r//,s7o///,v.- There exists in 
lji<.iian(l a class of bankers called bill brokers whose 

letion it is to discount time drafts for pirsnns who 
i -ire to realize funds immediati 'y and who arc wiUiny 
I ' pay a consideration to a\()i(l waiting' until tlu' ma- 
in litv of drafts. So uni\ ersal is the iiistum in Isnuland 
't drawing' di-nfts for accounts payable thai the rate 
i I discount is more important than tlu' late of liianinii 

..,j ^i j pi pi 

1 ii» 

\i()\r.\ \\i) irwKiNi; 

lllinls. Must l-'jl^lisli IjIIMIHns IIKII i|i|\C IK) (lilL'l't |(- 

l.'ilioii^ Willi h.iiiks liiit (Ic.'il tlnoiioli i|k's,c' hiil hrokd. 
in imu'li Ihr saiiii- way llial in Icojil iiiatlcrs Kiinlj,!, 
jKopIc (leal directly with a sdlicii,,)-. who .•(.|),.^.scl|t^ a 
harnsttr. who is the otie who appears in eonit and 
aeliially handles the ease. Th.- rate at whieh the l(,iiu 
hills ean he discounted in London dei)ends vei-y eloseh 
iiixin theotliciai rate at the Hank oi' Hnnlaiuh 

Wry few- of the hill hrokers ixpect to hold the hills 
until maturity, hut they expect to rediscount thi'in at 
one ol' the lnr;j;v hanks: their profit liis in the dill'erenc 
hi'tween the diseonnt which they -et from the eiistoitn- 
and that they Jia\c to pa\- the i)ank. The laro'c sfocL 
hanks of London are under normal c:i-emiistanees will- 
in<4' to discount hills at about i ._, per cent less than the 
15:nik of Knoland. Tiierefore the ojlieial hank rate i^ 
neai-ly always hi,i;iier than the actual I'ate. 

'I'he otlicial I'ate of the Hank of Lnolaiid |,as sueli an 
important ell'ict upon ci'edit conditions in this countn 
that it is \\orth while to understand the mechanism iiy 
which the relation is kv\)[ so close, 

17."). FiiKinc- hills. Interest rates in tjie two coun- 
tries are e(|uali/ed hy means of linance hills. A tinaiur 
hill is a draft drawn hy a hanker in this country ii|)oii a 
foreio-n hank for tlie i)ur|)ose of ivalizino' funds jieiv 
for the time heino' and with the inttntioii of tiiectin^; 
the draft .'t maturity hy the purchase of demand stcr- 
li'ii^' *>!■ cahies. It is simply a iiieihnd hy which a hanker 
liorrows moil, y in a cheap market and Joans it in a dear 
one. A concrete case will make the suhjirt clear. 

Suppose th( actual rate of (liseoniit in London is J 
per cent and that tin rate in this eoiiiitry i.s fl per ecnt 
nker is .ihit to i»oi-row funds in Knyjand and re- 

I I a na 

loan Ihrm in this country lie will lie ah|c to ni.ake a proti 

DO.Mr.STK WD lOKl-.K.N i;X( HANC.l 


I per eciit |)t r aiiiiuin. K ss the expnisi' ol' ■loiiin;' hiisi- 
'■. ,\ iKtiik'.r (ksiriiiL;' to ciiua^f in this t raiisaelion 
t oljhu'cd to actually hoiTow the i'mids in lMi<.',ian(l 
s1p|) the Ljold to this conntry. He ean aeeoniphsh 
■ ■-anu' j)ni'|)osc with less expense and loss ol' lime hy 
Jiawin^y- a ninity day di'at't a^^ainst a London hank and 
M Ihny- it in the loi-eiLiii exelianye maiket and loaning- 
:!i' pi'oeeitis at the jtrex ailing' rale. The pi'iee he will 
!i :ih/e for the ninety day draft will he the price of (le- 
liiand drafts less a disconnt e(|nivalent to the London 
! it ■. as we ha\e explained aliove in connection with the 
ij.iMtations on ninety day di'afts. 

li is not necessary that the hanker have a deposit 
i!((lit ahroa(h nn<Kr the coiuhtions mentioned it wonid 
!' \xi-y nnpi-olit;.hle for him to haxc a deposit \\ hen he 
luiojit loan funds to such advantage in his own conntry. 
fhis lack of deposil credit does not deter him from 
liiwiiiy- di'afU npon the London l)ank if he can make 
-'iiie arrangements with the hank for acceptinn- the 
ii;aft so pi'esented- in order to ,L:i\e it ne^otiahility with 
the hill hrokei-s. Al the expiiation of the ninety davs, 
liiiwcxcr. he is ol)li<^ed to have Hie fnnds in the London 
I'iiik to meet the draft. These fnnds he |)rovides hy 
;':iiehasin;4' demand st( rlinu a week oi- so hefore matur- 
ity in order to yive the drai't plenty of time to reach 
Knu-hiiul bet'ore the draft is ])resentrd; or. if he has 
\\aitcd too joiio-. he must huy a cable. 

17(5. rm/it on /litaiicc />///.v.— The .'uiiount of his i)i-otit 
• Irpeiuls entirely upon the ditrerence between the ])ro- 
ireds realized Iroiii the sale of tiie m'nety day dratt 
wWwh are near the face of the draft, as the discount 
rite in Knii'j.aiid is low- 1 . iilns the irit'T^s! !'.•■ Iijik (!;!!r!f'd 
K loaning the proeeeds. and tlii' pi ice which he must 
pay for the means of c(i\( linu IIk draft at maturitv. 


; i 

1 J-2 

Mn.\i:v AM) HA\KI\(; 

■CI I 

plus the coiiiinissiDii Tor ;icTfi)taiur payahir ro li^ 
Ejioiish Hank, and [\\v liritisli (iovrrniucnt lax oi. hiiK, 
Tlic hanker who issnes Hnancr hills is i'owvi] t(> \h- 
coiiie a spec ilator in sterling- fxdian^ijc hccansc his i)r(,(ii 
(lejKuds upon the price at which he can hiiy demand st. ; - 
lin^'- or cables eighty to ninety days after the date ..t 
issue of the finance hills. If he wishes to make sure 
a profit and shift the risk to others who are more N|)e 
latively incline( or who are hetter ahle to forecast 
conditions of the suj)ply and demand in the forei^-n ex 
change market in the future he may make a contract at 
the time of issuino' the finance hills for demand sterlinir 
ei^yhty days after at a certain fixed price. The issuing 
of finance hills has the same effect upon the markH 
value of foreign exchange as l)ills risin<«- out of commer- 
cial transactions. If Ihey are issued in laroe amounts at 
any one time they depress the market, hut when the time 
of maturity of these hills ai)i)roaches. the purchases of 
(hniand sterlino- to cover stimulate the market artifi- 

I f the condition of the market is such that <ro\d im- 
I'orts are imminent the issue and sale of finance hills is 
hkely to reduce the price of hills just enough to hrin<: 
ahout the import of i.ol(h In this ease the final resuft 
is exactly the same as horrowino money ahroad and 
shi))|)in,<.- it to this country for loanin<r |)urj)oses. 

In spite of this very cffecHve method of e(|ua]iziii«,^ 
interest rales helween dinVrent countries there are timi^ 
when the discrepancy hetween the rates is verv oTcat. 
This is accounted for hy the fact that unusual mn.ii- 
tions exist in one country or the otlu r. The defects in 
our currency system, of which much is to he said later, 
are responsihie for nivat variations in the interest rate in 
Xew Vork. Jt has heen said hy financiers of authoritv 

no.Ml.STK AM) lOHKKi.N i;X( IIAN(.E 1 i;i 

dial \c\v ^ >rk can never liope to iRronic the fiiiaiicia! 
ruihT of the world or c'oni])clc with L(;n(loii in thai 
rcspec-t as lon<>- as it is |)ossiI)lc Cor the rate on eall loans 
!n exceed 100 per cent, or so lono' ;,s it is i)ossil)lc for a 
'iiidilion to arise wlicre a preininni is |)ai(l for ciu'- 
i Mcy. TIk profits from Hie issue of finance hills and 
ii'iiii otlier intirnationai financial transactions are so 
Mi;all when .cl oned in i)er cent that the variations of 
"HI Dion market destroy the delicate ad.lustmcnt hy 
iiKikino- such operatioris too specidative and risky. 

The «rrcat adxantaoe which J.ondon possesses over 
< \ cy other fii ancial center is stahility. Hankers can 
: u.-ys depend u\Hm hciiio' ahle to realize funds upon 
Nitisfactory collateral in London and take no risk of 
liavin- their transactions absolutely l^locked hy a sud- 
den money j)am'c. 

177. Foreign dcpartmcut of a Ijanh-.~ln recent years 
there has been a nreat increase in the foreign business 
nf hanks and many foreign departments have In en cs- 
tahlished. This has l)een due t. tl • rajjjd extension of 
"iir foreign commerce and the lar;. numl)er of Amer- 
iiis traveling abroad, giving rise t a demand for 
I'anking facilities to expedite the forwarding of funds 
Hid the collection of drafts. C'omi)etition between the 
''.inks has raised the price paid for commercial drafts 
'iiawn by exporters, at the same time it has lowered the 
piice of drafts and banker's checks sold to importers. 
The advantages to a hank arising from the niainte- 
ince of fo! ign department arc, according to Mar- 
ma ff: ' 

1. The foreign de|)artment affords facilities to the 
general clientele of the bank to trans;ict all its li.'uiklrv.r 
''ii'^iness with the bank, thereby avoiding the possibility l',\rli;in;:r: p. It, 


MOM.^ AM) l{\Mxl\(; 

of liisiii;;' a prolilahk- ai'coiiiil that is djxm to siifccssl'i;! 
.solicitat ion Iiy a coiiipclitor. 

•J. S{i\(s as a vaiiial)lc aii\iliai-y tludnuh {\iv medium 
ol' a(l\(.rtisriiRiils and prrsoiial iii\ita(ioii to alt"ac't dt - 

.'J. C'oiiiiiiands proiniiK'Uce of llir name of the l»;'nk 
ainon^' .New ^'ol•k hankei-s. by whom its forrio-n ^x- 
chan^c is |)niThase(l. and amono- hanUiTs throtiyhoiit thu 
entire woi-id. with \\hom aeeonnts are kept, and hv 
mIiohi (h'afts a<>aiiisl its kttrrs of ereiht are nef^otiated. 

1. r.'aetically eoincrts the hank into an inlei'iiational 
liankinii institution, thereby \astly ine!'easiii<»- its Held 
of o])ei'ation. by phiein<jf it in elose touch w ith the lon^r- 
estal)lished monetai-y centers of the world. 

.■3, Affords the l)ank an opj)oi-tunity of placin<r loans. 
at i'emunerati\e rates ol' intei'est. in jMn-o|)eaii mone\- 
mai'kets when faxorable conditions j»i'e\ ail. by the pur- 
chase ol' bills of exchange as an investment. 

»i. Ad'oi-ds tile bank an o])portunity of borrowing'' 
funds l»y means of finance bills in any monetary centei 
of the world. 

The foreign departuient of a baid< usually transacts 
the follow in<4' business: 

1. Sells letters of credit to travelers and commer- 
cial houses. 

•J. .Sells drafts to [)ersons desiring' to send money 

'J. Hu\s drafts di'awii bv (XDoi'tei's on forei<>-n cm- 

]}] addition to these transactions, the possession of a 
foreiuii department gives the large international banker 
a chance to boi-row money abroad to loan at a higiier rate 
ol interest at iiome by means of finance bills, or to 
invest funds in sterling bills of exchange and thus 

DOMESTIC A\D l'()Ki;i(;.\ KXCilANi.i: 

1 i.) 

realize a lii^rlur rate of interest than lie eoulil ^et l.y 
Inaiiinnr at lioiiic, or to en-aye in prolitable arbitra<-"e 

178. Ti-dvclcr's Ic tiers of credit. — So many Ameri- 
cans travel abroad in tlitse i.ays that there is a larye 
(hniand for letters of credit. It is so nineh more con- 
Ncnient for peoplr to obtain these letters from banks 
uith whom they have an aeeount that if they are eom- 
pelled to nrtt them from other banks they are likely to 
transfer their aeeonnts to those banks. 

Letters of credit may be issued in three ways: 

1. The |)nrehaser buys the letter outright and pays 
cash for it at onee. The banker sells it to him at the 
selling'- price oC demand exchange for that day phis 1 
per cent commission. Tims a letter for £l,000 with 
demand ster'inn- sdlino- at .$, would cost $iS53 
jilus $48.55 or $41»().'}.55. 

2. If the ap})lieant is a depositor enjoyino- hi<,di 
credit, the bank is Millino- to issue to him a letter with- 
out payment until the customer has drawn money upon 
the letter and the drafts ha\e been received by the sell- 
h\fr bank. 

a. If the applicant is not a depositor or one liaving 
sufHcient credit, the bank will issue a letter upon the 
deposit of collateral security to secure the amount. 

lender the last two methods, the customers are not 
.lebited with the amounts until the drafts which they 
have sinrned to draw out the money abroad have been 
returned to the bank. These drafts are ch;iryed at the 
ciu-rcnt sellin<r rate of sterlino- exchan,<re jllus 1 per 
cent commission ])lus interest on the amount lor thirty 
I lays while the draft is comin.o- i'rom Kn.Ldan.fl and while 
the remittance to cover same is li'oin"- 

A bank can place itself in position to sell letters of 

(■--\ll IK 




credit by iiiakii);^' jUTiiiiu'cuRiits with a LuimIoi! hanker 
wlio lias a larni' iniiiii)ir ol' cnrrcspoinkiits over tlir 
M()i-kl to vjs\\ (li'at'ls (li-awii by \.\\v Iiokki's of letters. 
A s[)eciinen eopy of the letttr with the signatures of tht 
i.iaiia^yer of the department 's sent to e\'ery eorres[)()nd- 
ent of the London hanker. 

When a person presents a lellir of credit olftained 
from a Phikidciphia l)ank aikh'esscd I,) tht London City 
and Midland Hank and its corrcsponck nts to thc 
Dentsche Hank in Herhn. i'oi insta'ice. they will com- 
pare the letter with the specimen on tile, then they will 
w.i'ic out a draft on the Londoi City and Midland 
Jiaiik which tluy will ask the p'.sson pi-escntin^' to si^n. 
If the person has asked lor I'lO, they will .u'ixc him for 
the draft the amount in mai'ks \vliich they are [)ayinL; 
for sterlin^f dral'ts on that day. If the ])iMce of sterl- 
ing drafts is M '1().V.\ \n v I', the pei'son is intitled to 
M •1{)\:M) for the !.10 draft which he si^^iiid and which 
was endorsed on the letter of credit. 

The reason why hanks arc always so willing to cash 
letti'rs of (.'redit is hccansc of the yi-eat demand for 
sterlin^n" exchan;4'e eviryuhere. \\'hen the hank has 
hoiioht a draft foi' llO. it sends it to London for cri'dil 
and can inmu (liat<ly sell a dra t for 110 a^^ains' this 
er( (lit. 

The London City and Midland, when it recri\rs flu' 
draft fi'om the Di'utsche Haid'.. credils it to tlieii- ac- 
count and charucs it against the I'hiladelphia isank 
, 'I'he IMiiladc Ipliia haid< must |)ro\ide fmtd- i London 
hy huyinti' slerlmi^ ( xchan^e at honir. 

17'.>. Coni/llt /-('iftl lillils (if iiidil. Thes( are usi d 

i>y imporlc rs to purchase ^oods \\\ means o! 
them merchandise c;m Ik purchased in any part of flu 
glolii' on a c;in1i hasis. although act,i;il |)ayinciil ol' tin 





i)().Mi;sTi( AM) loiji.K.N i;\( ii.\,\(.i: rn 

■ ^1 <>r llic n-,...,|s iin|)(.rtf.| uill not I,c .Icnuuided of the 

i'portcrs. I,y \hc hanker fi-niislnno- t|ir credit, until 

'.'Innly ..f rcs,Krtivc .Irafts drawn l.y the exporters. 

\dvanee onkrs may he -iv,,, hy iniporters with expor- 

t'ls lor the inanuraetiire of ooods, aeeonh'i.o- to the 

s[KrdieMtion.s and reciuirenients of the iinporters'u ithoi.t 

IMvpayinent of tlie vahie of the -oods onlered. or a eash 

'!' pnsit. the eo.nin.'reial letter nf hein- snllident 

■ liinty in thr hands of the exporters. 

I i'c (xpork !s are henelited heean.,' thev receive cash 
'"'• -''ll iHereh;in(hse ordered nndrr Ihe letter of creiht 
' "h' date of th<' shipment : tl,al is to say. .h'afts covcr- 
!'-; the cost of iiierchan(hse. even if issued for a spec- 
'"' li'ne after siyht can he conv. rt( ! into cash hv dis- 
'■'-"iitiri- such (h-afts with their joc.d l,ank<>rs. " The 
l'My( r of the letter of cre.lit sio„s an agreement to reim- 
'•i>iM' the hank lor the drafts drawn under the letter at 
-'" '•""•'•<"t ••.■'!<• of exchan-c an<l to pav a commission 
"I 1 |H !• (vnt ..n drafts at sixiv days .-> si-ht. The fact 
"'■■' "'>■ 'I'-'fts arc drawn at sixty days ohviatev; the 
n'ccss!ty.,i'rhar,o,n,-intuest. fnrthe London hank does 
-'! I'.-iy the drafts nu'd sixty days after the -...ds have 
i-"' shipped and the h.ank n..ti(i,d that the draft has 
'"<n made. 

When the f.nvioner has f',.. ready for shipment 
'' •''■•'^'^ ""■ '''••'t ••"id discounts it with the local 
'mker. Ih. l(tt<rof eredit n,akin,o it .ecure and worth 
'""■'■ "'■"1 •■'" "nlinaiy coniUK ici.d .ImCt. 'I'he dis- 
""*'"^ ''-'"1^ 'i"'<'- Ii"l<^ !l nnid matinitv or sends it 
'" ''"'"'"" l"i-<l,s,.amt. IMnrr i| is due IIm. .\merican 

'ik pro\ id( s lunds m London to cover it. 

ISO. /////////,;-• f„mo>, rnhnu^r f,,r invisi mnit .— 
""I'l">^" til-' ral. r\- interest at hom.' is serv low at 
" '•'"'" '""■ '' '^ l''i^'' ahroad. 'I'he u.t. mat ,o,,al 

M()N!,\ AM) HANKlNCi 

h;iiik(.i- fiiuls that ho could make piotil by loaiiiii'^f in tlie 
lallrr niarktt. IK' ran do this wvy easily hy pmvhas- 
iii'>- ■'loll!''" hills and holdinu' tlicni hiinstlf insli/ad of 
Miidin^- thrni ahroad I'or discount. This he could easily 
do hy dctachin<4' the /irsl of exchan^i' ( I'orei^ii hills 
are always made out in tiii)licate ) and instead ol" indo's- 
in<»' it for discount, would write aci-oss the lace: "Vor 
acceptance only."" The correspo'.d<nt I)ank receiving 
sann- would secure Mceeptance and hold it. 

At the ind of tin- perio-l for which the hill ran. or 
at anv time iKJ'ore. if the holder found that lie needed 
the fiiiuls, the holder could take the scvuml of e\- 
chaii^i'. endorse it for collection and send it. The //V.v/ 
containing'' the acceptance and the .sccoud containin<4' the 
endorsement would to^'cther constitsilc a complete hill. 
The I'orrespondcnt would collect (or discount them if 
the\ were not yet duel and place the proceeds to the 
credit of tlie si'iidin^' hank. 

Suppose' demand stcrlinu- win- selling' at .^^kH,). the 
l?aiik i)f Kn.yland rate was <; jur cent and the avera;;- 
iiank rale in this country was t- per cent. In this case 
the price of hills woiild Ik': ' 

«>|i(ri (lixdiint liitc in ImijiImihI .>e/;. 
•t(l il;i\s' iiilcrrsl lit ■»' , nil .i!l.K»=:.0(ir'. 
\\v\M\ Mill .SI.Miii's " — .(lO.'o 

(•..wmii .iuii 1-H)',f =.001.> 


Therit'oK' the priei' of niiuty-dav hills would h. 

Suppose the hanker piirehasid ':i(».»M)0 of iiiiietv-day 
hills at SI..7S; the <'ost would Ik St7,H(U». At tiie did 
of the nine'v d;i\s In would he ahit lo sell 'JIO.OOO ot' 
(1( iiiand sttrhnu. say at i^J^.S.") (if the price had not llne- 

1 Miir'Tiitl. " liiltiiiMtioiuil I'.Ncliimtfc." |i. \'X\. 


Do.Mr.s'ric AM) roKi'.Kix i:xriiAN(;E no 


iKil'.d). or a total of ><|.<S, .)()(). His i)rolit would \)c 
IS..-)()()- S4T.«()(J or ifTOO. li' lif had loaned the i^A7,- 
MIO at .*{ j)er cent, he could ha\ c gained in interest oidy 
>^.'{.)H..3(). The net j)rofit on the exchange would tlure- 
Inre he S'.'Mi ..">(). 

ISl. (ii'nudu (uid French exchange. — The mone- 
tary unit of (k'rniany is the mark whieli contains one 
!iiMidred j)l'ennin^s. Measured in o()|d, ii is c(|ui\a- 
imt to s. •_':{«;{();> in Tnited States money. The (juota- 
liiuis f'oi- exehanuc in marks. ho\\e\ei-, aie (juoted, not 
:i^ till' ])ii( (, one mark, hut as the priee of four marks. 
l"o|- example, demand stei'liny- was recently <|uot(.'d at 
~^.".>i- 7-1 •"> k'ss l-M-2. meaninii- tjiat di-afts on (iei'man 
lianks W( i-e sold at S.<>1. 7- it; hss 1 -.'{'J for eveiv four 
marks. "Le^s l-.'}-J*" nuans that ]-.'}•_' pt r e( iit of 
>^.'.>t 7-1*'. must he deducted from I- 7-Ki to ^et the 
trui' (luotation. Kxpressed decimally the (juotation 
would he .i»t .()()i:{ less .()()().'} or ><.•.» UO. 

In foi-ei^ii txelian<4es the expression "\kv mille" is 
iil'ten used. One-half ptr mille (written ]-•_> ()-()()) K, 
1" !• thousand or !-•_'() per cent. It is a more convenient 
!( rm than fractional jierceiita^es. 

The I'rench monetary unit is the franc, divided into 
one hundred centimes. Mcasiued in ^^old. it is ((luiv- 
aliiit to S.l<fJ!»,") iu our money. The (piotations for 
I'rench exchange are yivcn exactly opposite the 1mi^- 
I'di or (ierman tliat is, they (piote the numher of 
:iancs which one dollar will purch.ase. A recent (piota- 
'ioM for d( inand exchannc oii Paris was .kIC. 7-H less 
I -.■{•-*. This nuans that .").!»; 7-H less 1 -:{•_' |h rcetit francs 
' il •><• sold ,or SI. II \v;i! |„. ,,()t((| that the 

!'■ li^MM-'-, the lower tiie «|uotations and 

\ ice MTsa; 

>. I .) IS 


'■|- I 


piotation th ui ."). h"' 


!<• (piotations vai'\ I -H per ceut ,,;■ in intervals of .'j-8 

M()M:\ AM) H.WKINC; 

'•ciitiiiK' (l)ecausi' .5-S (viitiiiir is api)n)ximatcly 1-8 j^i 
(viit of.-,.!.-, fraiK-s. the hasis of roinijutation ) .* Tlic in 
tcrvals hcnin „i;|| .-,.|-, .„„| „.,, ,|,,.^^| ^^^^^^, .^. .^ 

3.1(; 1-4. .).!(; 7-H, .5.17 1-2. .).!S 1-8. .1.18 ;j-t. etc.. 'I'l,,. 
reason for tliis is \hv fact tli;.t roriiKMlv 1-8 ikt criit ua^ 
dose cnouol, r,,,- tlic hrokrrs and was a coiivriiirnt fioi,n 
in nrhitrao-r transactions, licccntly pricrs aiv (|not((l 
clo^^tr and the ijnotations air rais(,| and louvivd hv dc- 
<l>K-tin,<.- or addin-' l-lt; per crnt, l-.TJ per cvnt or" l-(il 
[)(-'!• cent. 

In onUr to deal witli such awkward . (notations it is 
iKvessary to convtrt tluni into dcrinials. lor it is iiii- 
possihlc to find. r(«r instaiKT. .> per cent on .-,.]<; 7-8 1. s^ 
I -•{•2. To (NMiNcrt .>.1(; 7-8 k'ss 1 -.•{!> into a (kvimak n 
wonkl first fin(i tlic decimal cinivaknt of .007-8 
.0087.): then wc woidd find I -;}•_> prr cent of .l.n; 7-8 
- .()Oi:,(i - .-,.!(; . .o,)H7.-, ^. .-,.1,187.-,. To tins ^^r 

""'^' ■' •<'<"•'•■• •>.lT<>;n. it is'd hrcaust " ks. 

I-.'}-.' per cent ■• means a k.u er (piotation : smkv Ife liiu|,er 
tli«' fi.ymes are the iou(T the actual .inot;ition mnsrh,. 
Ilie reason for ad(hnn the .krima! instead of snhtraet- 
ili<4' it is ekar. 

Toconvei't a (juotation expressed declnially to the ren- 
idar fractional lorm is more ditlicnil. I ,. t Us take, for 
example. .-).l!i'J."). 

The ne\t ,i(arest (|nota!ion fVae'.ionalK- is .-,.1!) ;{-8 
(see list al)o\t) or .5. l;»;{7-,. which is too laru,. l,y .oopj;,. 
.OOlL*.") is ((juixalenl approximah ly to !-;{•_> p,.,"- ,.,.,,1 ,,f 
.■).1!». so we would compkle !he (|notati.m hs redncm- 
the .-,,I<i.'{7.-. I.\ I -;{•_' |„r e.tit. makinu it .-..IK ;{-8 phi^ 
l-;{-J. plu^ n pr. srnli:iL; a low.rlnn. of the aetn.d .piola- 

To find the vahie of a 00 ,ja\ hill ,.ti Paris for .52.', 
i tallies if dem.and exeliMiiMv v^,,*' ;it VK; 7 8 k s'^- 


l-.'}2 (."i.lTO.'JI as al)()\'cj \\c would calculate the discount 
and ex})eiises: ' 


C, iimisM.m 1 10': or W':: (';=rF.!i MH.l.F.) 1:5 

liduli Kill Sl.iiiip !-,'()'; or I-i?i)-00 .'(i 

j)i^c()uiit (III (Li_\ ■, ,it .'■,'; ;j.6u 

I'lMiu-. :i. !)!>() 

I'rirf i)f ilciil.'iiul .•\cli;illf;'i' jlT.fCil 

Pri.. r !li)Ml;iy .-.chaiVL'c 5-M.031 

(^UotilllOIl |ll T Sl.lMI Ulirlll m' CNcilimLif ."j.-l 

.'{.".)!> IVaiK's are added to the pi'iee of demand hecause 
:•() da\' exehany'e is \v(iftli less than demand and the 
Idwc!' he uotatioiN Hie i^reater the numher of iVancs 
:i\r!i i'or SI. 

\>1. ArhilraiiC.^ 'V\w ai'hitra^e transaction consists 
ill 1mi\ iiiLi' or selling- i'\ehan<4'e on a cei'tain center indi- 
ixetly Ihrouyh a third eit\-. For example, a hanker 
wishini'' to increase his London halanet would huv Her- 
iiii exehaii^f and instruct his (ierman coiM-espondent to 
use the proceeds ot' the hill in purchasing" sterlin<i' in 
I'm I'iin. thus iiici-easin<4' his London halance l)y the tri- 
aii<;nlar opiiation. 

Suppose' a ha' Uei* had an opi)ortunity to sell a draft 
nil r I'is hut ha(. no funds tluiT. It would he very 
' as\- foi him to sell the di'aft. purchase with the j)ro- 
(■( rds ^t( rlinn' exchan^^e. I'cmit it to London with in- 
truetions to purchase Lai'is « \chaniit in London v th 
llic ]>roeeeds and forward fm' eredil to the Paris cori'c- 
piMMkiit to co\ (. r tin draft sold ;d lir^t. 

Supjjose tli<' (juotatioiis Inr IIk' day were as follov.s: 

Sliiliii^: cMJiMMpr in N(\\ >'ii?k s (>| 

I'jirls ('\clianfrr in \>\\ ^ nrk j.l7'_. 

I'riincs it) I.iiiiilnii Jj..'5 per t' 

';.MMlV, " Iiiii nrili-'Tij 1-' v.. h-mL'"-.'" p. 11.'. 


I"'--' .M(t^!:^ and i5.\\kin(; 

If Ik' sold ;i (li'al'l Cor •_'.").•_'.■)() (Vaiics. lie would rccc'i\c 
thn-dVotii SKH7i>.'_';} (•_'.-).•_',>() duidcd l,y .).17.-)). To 
cover this draff in Paris hy l-'rcm-li excliau.yv piirdmstd 
in London, it would he ncccssai'v for liini to hnv sterling' 
cxclianuv at XLHL If •_'.-,.•_>:, francs in London sold 
I'or f he would he i'e(|uired to huy £' I. ()()() in ordei 
to oet -i.-j/J.^O francs. This would cost him in New 
^'ork at s;.Hk st.siO. His profit would he: 

Prncifils ^1,^7!) _);{ 

t'"-l 1,^1(1 

His London hanker would ])rohahly ehar^'e him 1-40 
per cent foi' doiii^ the husiness. which woidd cut down 
his profit hy S].-J]. lea\ in;^' it net at ahout s.'W.OO. 

The (|uotations in \ew VovU foi' continental cx- 
clian^i' arc' inlhuneed lai'^cly hy the price of sterlin«4' 
exchange, hotli in \ew ^'ork and iti Hi'rlin or I'aris. 
If from anv cause the prici' of I'onlineiital exciiaiii'e in 
X(\\ ^'ork should tend to fall to a point where tliei'c 
would he a profit in the arhit i-aye transaction, the de- 
inand for it on the part of the hankers who wish to 
"I'li^c a profit from arhit ra^in,t>' would immcdialclv 
force up the j)riee a^ain. Therefoi'e. there is a certain 
relation existing' hetween all the iiuotations of foreio'ii 
exe!ian<4c. When tin re is iKithei profit noi- loss from 
aihitrauinu-. they are said to In at |)ar. 

l'"or instance, if d( niaiid st'ihn^' in Xew York were 
at s J,.S(i!;.">. the ////// pnr. and in Hei'lin a! -JOA'A. also the 
////// /nir. the comiiieicial |)ar of marks in Xew ^'ork 
could he found ]>y dl\ idin-.^' 4. HOC..') hy '20.V.i, c(iuals 
.'-'.'{iSl', the \,ilue (if (iii( maik ( xchanL;e in Xew \'oik; 
midtiply it h\ four ( .•_';{,S-i\ i .l).j;}2) and we hive flic 
commei'cial par of excliari«ie for mai-j. < \eh;uii,c which 
is also the iuint par. 



1H;{. World's stock of (/ol(L—Thc total amount of 
;:'(il(l estimated to have been ])ro(luce(l in the world up 
til the year 1911 was !f^U,()0(),()()(),()()(). The amount of 
;^(i|(l ill use in 1910 tlirouohout the world as money was 
si;.."i()(),()()().()0(): thus leaving- over .$T,()t)(),()0(),0()() to he 
:i(counted for. Of this amount it is ealeulated that over 
three hillions have been consumed In the arts, and Jit'tv 
iiiilhons have been lost through the abrasion of coins; 
and that $2,00(M)()().()00 has been exjiorted to the Asiatic 
(nuntries, where it has been hoarded and j)asse(l out 
mI monetary use. This leaves unaccounted for over 
S'-'.OOO.OOO.OOO, which probably rei)resents the -old that 
las been Inst in transporting- it across the sea. or has 
ti( ( n hidden away in the earth, or is at present in hoards 
(if which no record is kept. 

IH^. Ilistor// ()*' till' pit clous mctah. — Accorditio- to 
t!ir fiu'ui-es of the production of sil\er throughout his- 
! ric times it is estimated that up to li)l() there had been 
liroduced $1.*{.77."),<)<M).()()(). which was accounted for in 
|iirt as follows: Consumed in the arts, .*i<i.7.-,().0()(),()(M); 
iliAotcd to monetary uses, over $4., ()()(),()()(). ()()(): e\- 
|| .rtid to I?ulia and China, ov.'r J^'i.OOO. ()()(),()()(). This 
l'a\cs unaccounted for the sum of the nillions. 

In ancier.t times tiier'' was considerable pi-oduction of 
Mil pi-ecious metals, mostly trom 'he mines of sdutiuin 
l.uropc. These sources uerc worked by sla\( lalxtr al- 
' Hist exclusively, and the j)?'<»durtl ns found their uay 






into L>r( at lioanls wliicli strxcd no xalualilc piii'jxisc' otln 
than to |)i'o\ i(K' a \ isihlc (,'\ idincf of tlic wtaltli and 
powci- oi' till i)\\ iit'i". ( )nly a small |)aii of tlir cxistini; 
stock (d' precious uk tals \\ as used as a circulating' iiu- 
(liuiii. and of course at that time its use as a liasis dt 
ci'cdit was entirely unknown. 

(iolil and ^lUir wtvv rrti'iirdtd a-^ an cud. not a- a means; a^ 
t I'ca^n ic, not iiinm \. 'rii('\- wri'c di^t rilait id, not l(\ Iradc, l)ul 
l)\ war. It wa.s tlK hand nC the (■(iiuiuiini' tliat stri|)i)cd tin' 
iVoni [lalaecs and tiiii|ilr>. If \\v\ \Mif takni t'l'cnn tlu -.toi'c 
dt' nHinarclis, il wa> imt to tVrip^lit tlir ca a\an> nt' ronnnirci. 
Ijiit ti) till the cliarii't- and nnilr earl--, t(i load tlir sinn})tt r lior-r- 
()i- the cainfl trains of a \irt(iri(iu- army.' 

At'ti'i- thi' fall (d' the Honian l\mpiic the mines fell 
into the hands of the harharians in their southern mi<i'i'a- 
tions and ceased to he worked. 1" rom that time on 
urdil the disco\cry of America the (|uantity of precious 
metals in l-iUrope (lecreased ratiic!' than increased. 
Lai\y'c (|uantities wcic used in dccoi-atin^' the chui'clies. 
There was prohahly e\-en less used for nion(dary pui- 
|)oses than the limited an id wiiii-h had heen so used 
in the ancient times. 

IH.). Tin- Feudal I'lriod. I'nder the feudal systiiii 
society \\as ornaid/ed on a hasis which re(|inre(l V(r\ 
litth' ^■\cllan^e >d' products, ami most id' such (.'xchan^i 
as ixisttd was doni' on a li.irtc r hasis. Taxes and i)ay- 
ments to the lord ol' the manoi- wx'rc madi' in ])ro(lucc. 
The i'o\al eourl was niaudain(d rmt I'rom monev taxes 
collected, hut from tlu pi-oduce of th( ci'ow n huKK 
wliicli the kini;' rec-ei\cd as the- lord of the manor. W'ai's 
were condu(dcd withmd the use of mout _\ ; the sol- 
di* were e(|uipp((l from iheir own resources antl svcrc 

' y A. W'.lki r, •• M(.ii.\," p. las. 



ii^t;iiiK(l Ciom tli( I'oraoL' ol' the counli'x- ti';i\ crsrd in 

( ailll);lli•ll^. 

IH(). Discover! I of A iturica. One ol' liic most iiiipoi'- 
! iit flfects 'if liic (lisco\ri'y of Aiiirrica on I^'iii-opcaii 
idiioinic coiuJitions IVoiii tin- (juantitiis ol' .sihir 
which hrniui to Mow in an incrt'asino- stirain IVoni the 
Spanish colonics to S|)ain and (Voni Ihcncc to he dis- 
liiiiscd throuii'hont Kni'()])c. TIic ca^cr (picst of tlic 
lai'ly explorers for the precious metals can he hettei- 
understood when we know that the value of silver was 
Many tinu's its value to-day. and that the precious metals 
\u re al)out the only pi-opeity which could he jjrofitahly 
transported dui-inii' these limes when transportation 
".as so dillicnlt and e\])ensi\e. 

I. ST. ElJ'irl of silver from A in cried.- The effect of 
'lie .\mei-ican siher upon the economic conditions of 
l'",uro])e was revolutionai'y. Payments fi-om the tenants 
I" the landlords for the use of the soil had heen made 
I ither in |)roduce oi- in lahoi-. a sxstem which I'educed 
llie tenant to a condition not far remo\ cd fi'om that of 
the slaxf. (Ommerce was so limited that eveiv com- 
''I'liiily had to he practically sell'-suppoi'tin<^\ and its 
rnnsumj)tion wa.s limited lo t!ie articles which could he 
produced in tiie immediate vicinity. The lack of com- 
nicrct' made it |)ossil)le for famine to exist in one county 
AJiile wrcat plenty existed in the iieiu-hhorinL)- eountv. 

The transmission from payment in kind to money 
pavinent. which soon |)i'ofoundly altered the relatiotrs 
"(iwfcn the loi'ds and tenants, makinti' the latter much 
"lore indep( iid( 111. was not so much due to the greater 
'Mindanceof money as it was to the effect produced l)y 
'h new silver on prices of ail C!»mmodit ies. The Span- 
nils to whom this new siher tirst came, appeared in 
ihe mai-kets of Kuropr . ^ jMirchasers of -ouds, thus 

1 ■ : ■ 


^I()^■!:^• and h.\\ki\(; 


»'i(;ilitin- a steady (Iciiiand lor export. TIic rise of 
prices and tlic skady market uavc a stinmliis to indus- 
try. money had I.een nse<l eliiellv as a store 
"f yahu- and iiad heen hoarded u,, as a proteetioti 
anainst inisrorliuie. This was justified from the eon- 
•litionsor llie ti.Mie uhieh made it (htlieidt to" aeeumuhite 
any other form oC property. The huid A\as not houyht 
and sohl as to-day. hut was n.nsidered permanent^!,, 
the possession of famihes who held it under various 
i"rms of hmited title from tl:e isini-- or lord. 

There was very little opportunity to ae,|uire im.due- 
tive eapital. What little invested eapital there was 
'" ""■ *'•"'•" "'■ '''»"• mills, etc.. was held l.v the lords 
under the same eonditions as the land praetieallv 
Money was therefore ahouf the only form .,f propertv 
m whieh saviiu^s eonld he invested. was 
ineentive to eireulate money e.xeept when misfm-t..,. 
(oreed the possessor to release it for the neeessities o 
Jilt, or when it was extorted hy foree. 

1S8. //////r/.////.v//u/,////r<7.^ Himetallism is a monetarv 
system un.Ier whieh the Government permits anvhodv t"o 
l>rm- uoh! or silver to the mints and have it eoined into 
money winch shall he le-al tender for all purposes. Hy 
thus perniittino- the eoirta-e „f m.-tals without restrie- 

tion, the relation hetween the values of , oins an.I hnllion 
IS automatieally re-ulat..,!. A demand for monev will 
tdi.I to M.erease its value eonipand to h.dlion; ov, as it 
Jil'P<ars to the puhlie. the priee of hullion falls sh-ditly. 
Kven a very small <Ieeline uouhl he sutlieient to hidu'v 
someone to eonvert hullion into eoins throu^l, the mint 
and thus re-estal.lisi, the e.|mlil)rimn. Prior to IHK; 
ni.-t eivilized nations were <.n a himetallie hasis. admif- 
tii!- to their mints both metals. !„ the Tnlled States 
tl.e lirst coinanc hiws esla])lishe(l a douhle standard; the 




dollar In lir t'(>i!i|)n:-,cil of either JJTl.-.J ^vain.s ol' 
s;l\cr Ol' "J l-.7'> ^^fair.s of pure n'old. the I'alio as to weight 
li( iiiL^' lirtc'fii to oil''. Ill l!s;U llic ratio was made six- 
tr( II to oiR', tin- aiijuiint ol' pure "^old in the eagle Ijeiiig 
!V(hieed to '2''i.'2 grains. 

1S'.>, l)i/fiinliii.s ,'//' — In tlie study ol' the 
standards in a pre\ ions eha])tci' it has been seen how 
llic (htVereiK'e in mint ratios between the diU'erent 'i'o\ - 
(inments created a (■on(htion which mack' it ini))ossible 
to keep gold and .siher coins in cii'cnlalion eoiu'urrenlly. 
Ill I'act there has been no lime since :lie founding of the 
;:o\trnmenl ol" the I'nited Stales that il could ha\c been 
said that the counti'v \\as actually u|)on a double stand- 
ard. The ti'uth is tjiat the I'nited States was lirst upon 
a siher standard; then from IS.'U to 1H(>'.? it was upon 
a gold standard: then from ISd'J to the ixsumplion of 
specie payments in 1S7'.> it was u])()n a |)aper money 
standard; from 1H73 to 1S7'.» it \\as nominally upon a 
single gold standard, and after the latter date actiially 
upon a gold standaivl. 

In ISK) the I'liitid Kinmlom a(loi)ted a siuii'le <>(>ld 
standard. It was the fii'st country to do so. The other 
countries of Kui'o])e and the ( 'nitt;! .Statt's continued 
nominally upon a gold standard until the seventies. 

Hefore the beginning of the nineteenth century bimet- 
allism in lMir()])e was practieal)le because trade at that 
time had not been dexclopcd to a jx^int where the dif- 
I'l I'ent ratios in the diffd'cnt connti'ies produced any 
a.jipreciable llow of metals. 1 1 is not initil \alnes and 
prices i'esi)ond r(adil\ to conditions of supply and i\v- 
maiid and until Ibci'c is sullicicnt commercial intcrcojirse 
I'( twceii h)calities to c(|uali/.c \alues that dilliculties con- 
icrning tbe standard arise. Prior to the ninctt'cntb 
(■( ntiu'v there \Mre so man\- intei'ferenct's with tjie 





I i il 







lii 128 II 2.5 

j^ ■» 11 = 

t^ lail 2.2 

::i^ - 

I: . 2.0 


k. ^ 

nil 1.8 








K 1 4609 


-M('M;V .\\I) H.WKINf; 

iiral play of supply and ( llial the values were 
mostly c'()ii\(.iiti()iial lather tiiau coiiipft:; : ;e. 

I!>0. Advuutn^^i.s of hinula.' Xotwithstaiulin-- 
the fact that practically all nations except the I'nitcd 
Kino(l,,„, were on a hinictallic basis hcl'oix.- 1870, the 
system could not he called international hinietallisn'i he- 
cause of the different ratios of the various countries. 
Those authorities who adv.K'ate hiuietallisin do so on the 
^n-ound that ii assures a more stahle standard than either 
metal il used eNelusi\ily. It is ar-ued that if the pro- 
ductI(Mi of eidier nietal should diminish co.npare.l with 
the other, its iK.tural rise of value wo.dd prevent its 
bemn- taken lo the mint for coinaoe: the monetary 
dc/nand of the country would therefore fall upon the 
other iuetal accordin- i,, Cvshanrs law (which states 
that cheaper money tends to drive. .nt the dearer). The 
mcreased .lemand for the more abundant metal, trans- 
'*■'■'■'■'' '" it '■'■'>m the scarcer nu tab would tend to restore 
tiu' e(|uilibrium be tween tlu- two. 

I-'m- in^iance. if under the conditions just mentioned 
It had o,,|,| i!,;,t |,.„| ^.,,,,,,„ scarcr and more valu- 
'•'''*■• ""<l<'- I'imetallism tlu money demand would have 
'"•'■" tnuislern.l t<. silver until its bullion value a-ain 
^^■■is restored I,, ;u. .•.,ualily with ^nld. If there liad 
'"<" ;• Mt.ule unid standanl und. r the same circum- 
stanc(s tl,<. increased valu.' of o,,j,| ,voul.l have resulted 
'" •■'" ••'I'|n<rl.-,!in- sl,-u,<laid an.l a consr.pu ii! f;dl in 
pnces. Tudrr lb, dnubl. sl.ui.lar.l 'here c.uild b, no 
rise ,.f Mvneral prices until the ,|iianlilv nf b,,tli moU 
;"id silv.r ha<l allrred sullicientlv b. pmd.Hv IbisivsuH. 

I'.'l. 77/, sni^/r shnn/ar,/. Thr .bllicult irs inherent 
" "'- 'l"-'l'l<' sfMudanl have |,,1 to lh<. use nf bnth metals 

<'"'""' I'-'ly '^u^\ i^iven n.mpletc le-al Icn.ier mialitv! 

"" >'• * n iiu jiiorie IS 



Silver is coined in limited anionnts only, and used solely 
\'nr the minor coins. This was tirst systematically put 
III practice hy the I'nited Kingdom which, as has heen 
said, adopted the single yold standai'd in ISKl. All the 
(isili/.ed nations have since adopted this mode ol' usin^ 
the two metals together, to the accompaniment of a 
sinyle ^'('Id standard. 

in the Tnitcd States the smallest u'old coin that can 
lir com eniiiitly used is the (inai'ter ea<^!e ( •'^•_'. .")()) . which 
(■(irres])oniis with the British half soxerei^n. the (xer- 
man ten-mai'k piece and the French ti\e-rranc piece. 
Sihei" is therel'orr used for the smaller transactions, and 
i;Mi<i'es in si/r from the ten-cent ])iece to the dollai- piece. 
I'oi- the smaller transactions siher has not l)ulk enough, 
so resoi't is had to coins of nickel and coj)|)er. 

If silver is undervalued, undi'r the douhle standard, 
it will tend to disappiar from circulation. 'I'his hap- 
pi ned in the I'nited .States undei- the system adopted 
in IS.'U and IH.'JT. Sihir was (h'ixrn out of circulation 
ii\- n'old. \\\A aft: r the discoxc^'y nt' n'old in lSl-'.> in 
(alifoi'nia. the yellow mrtal was poured upon the mar- 
ket in lai^e amounts: unld eoinat^c increast'd while the 
\ahie of the metal fell, and siher disajipeared from cii'- 
eu!ati(in. 'I'his led to the act of 1 S.").'{ whii'h created the 
suhsidiary system in the I'nited State.. Half dollars, 
i|uarters arid dimes were coined of such short weio-jit in 
lint' sil\( r that no one \v;is lemptid to ( \port them or 
to nielt them for commercial pufposes. The half dollar 
was made to conl'iin 17-. H trains of line sihei'. The 
-■il\cr dollar, tin iVee eoiuiiiic of w hieli ;it tli;it lime was 
authorized, contained, as it doi's to-day. '{71.-"> urains of 
pure siher. The suhsidiarv silvei* was not, of eonrse, 
!i"eci\ eoini(i; ;in(i iiieicjore i^ojtj coiuii iioi in- liioiii 
out of I'irculat ion. The yi)\ermnent alone hou^ht the 





-MOM'.V AM) nA\KI\(; 

Sliver bullion in the market, and arrannrcd for its coin- 
an-f. To uuard against possible abuse, the sul)sidiarv 
silver eoin has been made a lr<ral tender only up to .$10. 
The prolit arisino- jn eonneetion with this eoina^re is 
merely an incident in providin<r the country with a 
medium of exehanm'. 

1!>2. Earhi attempts at /////^///o//.-^After 1870 the 
annual world output of ..•old fell ofl': and as a result 
^•old tended to appreciate in value and j)riees I'eil. This 
process was hastened in the Tnited States by the con- 
traction of the pai)er money issu j during- the Civil War. 
HuMiKss to suH'er as prices continued to fall. It 
Avas thouoht to improve business conditions and to put 
an end to i'allino- prices by issuing- an additional amount 
of pajur money. This led to the formation of the ^rrcen- 
l>ack party in the TOs. It was stron^- enou<rh to push 
Ihrounh Cono-rcss a bill which i)reveiited the further 
retirement of -.Teenbacks and provided for an additional 
issue. Tresident (Jrant xctoed the bill; but the fiu-ther 
retirement of the lirei nbai'ks ne\ertheless was brou^dit 
to an end. and the (piantity in circulation fixed at the 
amount at which it now stands, namely $.'M.().()()().(H)0. 

This attempt to raise prices by further pa|)er money 
issues was unsuccessful in itself: but it inau^nirated a 
moxement to accomplish the same purpose with silver as 
the means. Olher (nunlries. lio\V( \er. wei'c abandoning- 
tli«' d'Miblr standard. The decrease in the i)ro(luction o7 
/^'"'•I ••'lid the increase in the oiit|Mit of silver. to<retJier 
villi the example of Kn<.-|;,nd which \\;is on a y-old basis. 
were no doubt the causes which in(bi<-i(| the bimetallic 
countries to demoneti/c silver at this time. 

!!».'{. The Liitiii ('iiidii. Prior to ISTJ. l-'iancc was 
i'i- ^lM.^t iritporiani iiimeiaijic country in tlie world. 
Att.r ISdt I''iancc was in uai^ue with several of the 



smaller countries in Europe: Italy, Greece, Rpigiuni, 
and Switzerland. This lea<rue was the Latin Vn'um, 
which was so inii)ortant an element in the silver dis- 
cussion of the do's. France furnished these countries 
with coins of n-old and silver, so that for monetary pm-- 
poses the Union might he coiisidered as one country. 
The Latin Union, tooetlicr with (Germany, created a 
demand for silver which maintained its value for some 
years in the face of increased production. 

In 1871 the German Empire was founded and the 
monetary system of various countries composing the 
emi)ire was entirely reconstructed. The free coinage of 
silver was suspended, and supplies of gold were accumu- 
lated to maintain the vahie of all the credit money of 
the empire. 

France, which had acted as an e(iualizer of the values 
of gold and silver in Europe u]) to this time, in 187i 
superseded the free coinage of silver in resjjonse to the 
tendency of the times. 

U'4. DcmoNcH-alioii of silver h// I In- r nit aJ Staffs.^ 
A series of compromises had hrought about the same 
result in the United States. The coinage of silver dol- 
lars— full tender, freely coined silver dollars was 

dropped in ]H7'.i. Paper mon<y alone was then in eli- 
eulation: <lepreeiated i)aper. fiat currency. If specie 
had l)een in circidation it would have I.een gold. After 
1H.)(), with the inllux of new gold, gold hccanic the real 
i>asis of the monetary systt'in. The existence of ;i nom- 
inal douhle standard was forgotten. In 187,'} it wis 
expected ' ilie p.ipt r money would he soon gi\en up 
■111(1 a specii- systdn re-estai)Iishe(l. Sp< cie pavnieiits 
were, in fad. n'suincd in IK7!>. Hut when the silx* r 
'loilar was dropped in 1H7.'J from the list of coins that 

could l)e struck. hi?uel;dlisn). |onn- olvsojcte in nraetice 
^ vii-n 

I , j»| 


'I I 





was finally ended by law. This lias been often called 
"the crime ol' 1873." The dollar was supposed to have 
been (ir()pi)e(l from the list by stealth, by persons inter- 
ested in the gold standard. It was done (juietly, to be 
sure, probably because no one at the time thought it of 
any moment. 

10.). Act.s (jf 1.S7S and /s.'id,— The greenback ])arty, 
having failed in its attempts to issue more pa{)er cur- 
rency, sought to secure the free coinage of silver. This 
it could not effect; but by way of comj)romise the 
acts of 187H and 1890. already referred to in a previous 
clia|)ter. were passed. These measures provided I'or the 
purchase of silver bullion by an issue of new Treasury 
notes, the total issue amounting to $1. '5.), ()()().()()(). 

In 1878 the HIand-Allison Act i)rovided that th- gov- 
ernment should purchase not less than -S'i.OOO.OOO worth 
of sihcr bullion nor more than $4.0()().()()() worth each 
month, the bullion to be coined into dollars of the old 
.standard of iineness. namely .*J71.'-'.5 grains of j)ure sil- 
ver. Oidy the minimum amount was purchased each 
month. During the ])eriod 1878-181)0 about 2..)00.00() 
silver dollars were coined each month. 80,000.000 a year. 
These dollars were overvalued, limited in (|uantity. of 
full legal tinder, and in every respect a,s valid for |)ay- 
ment as gold. 

In 18'.»0 the .Sherman Act was |)assed. oidy to be 
repealed three years later. It marked another comi)ro- 
mise between tin friends of free silver and its opponents. 
During the threi' years of the life of this act. silver was 
])urchase(l jjy the government to the e\!eiil of adding 
•21 8.000,000 dollars to the country's monev supply. 
Tnder the act of 1878. a.')'_>.000.000 dollars had been 
coined: so that when these operations came to an end 
570.000.000 dollars of overvalued silver had been coined 



;m(l put in cirrulation. At one time hctwccii 1890 and 
IS'.t.'J Ihc silver dollars were coined to sneh an extent that 
they seemed a!)ont to drive ^old ont of eireidation. This 
was the eliief cause of the panic of 18!>;i, whicii led to 
the repeal of tlie act. Ouinu- to the increase in tlie 
(•oinitry"s ])opulati()n and c<»ininerce since IH'J.'J tlie de- 
iiiaiid for money has enormously increased; hetice, <jfold 
has remained in Die conntry side hy side with silver. In 
other words, the o\er\alued silver has hce?i as o(K)(1 as 

Il»(i. liritisJi Iiidirt and flic roiiui^^r of ,sili-rr. In 1893 

Hritish India j)ut an end to the free coina^ro of silver. 
Hritish India is the most important connti'v of the East 
and had always ahsoi'hed immense (luantities of silver, 
it had freely coined the siher into rupees, whose hullion 
content is ahont two-iifths that of the I/nited States 
dollar. The continued fall in the value of silver, how- 
e\(r, had forced the l^ritish n()vernment to close the 
mints of India to its free coinage. Thus in 189.'} the 
last twooreat mai-kets for silver the Tnited States and 
India- were closed. Since ISD.'J silver has remained at 
practically the same level in resi)ect to its yearly pro- 
<luction and price. The price has heen in the neij^dihor- 
iK.od of so.tio ,„.,. ,„,,uv: and that has made the market 
ratio ahout :} !• to 1. It follows that the silver dollar is 
worth, as metal, less than fifty cents in ..-old. Silver no 
lonocr has .a \'rvc openinu- j,, nionetary use. As suh- 
sidiary coin the amount that shall he added to the circn- 
latiny- medimu d. |»ends on the |)urcjiases which uovcrn- 
m( nts choos* to make, Th-' act of 1900. dcscril)ed in 
a previous chapter, where i.v the treasnry is empowered 

• ■":■-"■•■-■•"'•"•■.".•"■"•■ ii; L;.'];; ro lii.ijiiTiiiri 

the money of the I'nited States nu a .u'old hasis. ensures 
that the silver dollars shall circulate at par. 

1 1 



16 i 


107. Final failure of bimetallism. — Bimetallism might 
have l)een possible if Europe had joined with the United 
States to bring it about. But there never was a chance 
for concluding such a compact. Crreat Britain at no 
time was friendly to such a proposal, except in the case 
of British India; and it is doubtful whether even such 
a great silver-consu.ming country as India would have 
brouglit any great strength to a bimetallic league. 
W^ithout (ireat BrUain, (iermany woidd not come in; 
and M-itluHit these coimtries the United States would 
not. So, wliatever the abstract possibilities of bimetal- 
lism, it ne\er had a working chance of success. 

For the mass of tlie people, however, the problem of 
general prices is the most important. How far would 
international bimetallism have steadied prices? It would 
depend upon the extent to which tiie total supply of gold 
and silver would be affected. In 1H90 there was some 
reason for hesitation. The world ])roduction of gold was 
virtually stationary; while that of silver was steadily 
growing even in the face of a fall in its price. If the price 
of silver were raised to $1..'}.'J an ounce (the price in the 
United .States, gold correspor.;ling to the ratio of 1.5lo 
t(} 1 ) Hoods of silver woidd make th-ir appearance. 
Free coinage of silver at this ratio would have doubled 
prices, it was said, in ten years. The bimctallists, on 
the other hand, maintained that the increase in the out- 
put of silver would not l)e great, and that with a sta- 
tionary output of gold the demand for silver would be 
so great that changes in pi'ice would be moderate and 
would be spread over a considerable period. They fur- 
ther stated that any upward trend in prices would be 
beneficial to fbc debtor class. 

However, al'ti r IHKO tlie danger of a stationary or 
declining yearly output of gold disa])peared. If silver 



liad been freely coinable as well as gold the totai money 
supply would have inereased at an enormous rate. Even 
witJi the low priee of silver in IHD.'J the i)roduetion did 
not diminish. ^\t increased prices it would have been 
/greatly stinmlated. In a word, bimetallism would have 
unsettled prices to a much greater extent tjian even the 
increase in the world's stock of gold has done. The ex- 
traordinary increase in the ])roduction oi' gold has put 
an end to the propaganda for bimetallism. The rise in 
l)rices has been phenomenal, and has prevented any fur- 
ther agitation for the rehabilitation of silver. 





1!)8, Kcoiioiiiic .sitiKilioii ill ('(HKida (iftcr the Con- 
quest. — A brifl' sm\iv of the iiiiancial and monetary 
system of Canada is essentia! to i)ut the student in toueh 
with present day ])rot)lenis in that country. Jt is scarcely 
necessai'v to enter into the niot)eta.rv situation (hn-in<)' 
the I^'reneh reoime. however ititerestinn' that miyht he. 
C'aiuuhi iWd not hecome a Hi'itish possession until the 
Treaty of Paris was si^iu'd in 1T<'>.'}. although Quehec 
capitulated in 1T.")!>. Voi- some time ])recedin^' the 
capitulation of (-^uehec. the ti'ade of Canada had heen 
almost alto^ethei- in the hands of ^oxernment oilieials, 
who manipulated it for their own henetit. As a result 
there were no open markets I'or the produce of the 
couTitiy. The rapacious agents of the <.foveriiment de- 
manded it all. They paid for the ])roduee in which they 
dealt with depreciated and ultimately, ahnost worth- 
less — pa|)er money issued hy the colonial <4()vernment. 
After the fall of (^neluc these ollicials returned to 
France, leaving- Canada practically destitute of a mer- 
cantile class. 

10!). .V( r.' Kiii^]tiii(J fniiJcrs.- The victorious l^ritish 
ai'iiiy was followed hy a force of shnwd traders from 
New ^'ork and Massachusetts. Tluy came to C anada 
to seeui'e a share of the eontrai'ls for furnishing- the 
troops with supplies, and also io particiijate in the fur 
trade which had reached enormous ])ropoi-tions. They 
dealt e\tensi\ely in u'oods of l-'n^lish manufa<'tui'e. and 




l)()iinlit from the colonists their farm produce which tliey 
exported to (ireat Britain and the West Indies. Thus 
the wholesale trade of Canada fell into the hands of Xew 
iMi^laiid traders, under whose control it remained during- 
succeeding- years. ( )nly the retail and the domestic trade 
continued in the hands of tlie French, The racial 
differences and ])rejudices, together with these facts, 
explain in larfjfc measure the discord which subsecjuently 
arose between the two races in Canada. 

The New England traders distanced with ease their 
French competitors. The vi^or and enterprise of these 
dealers almost at once ^ave them a commanding- posi- 
tion in Canada. To them, more than to any other cause, 
was due the recovery of the colony from economic paral- 
ysis. It is true they received very little support from 
the p^ii^lish military administration. The army officers 
who held the country and administered it under military 
law affected to despise these merchants. They looked 
with more favor n[)on the Canadian noblesse who had 
remained in the colony, and preferred their aristocratic 
society to that of the democratic and resourceful trades- 
men of their own nationality. 

200. Financial situation after the Conquest. — The 
military occupation of Canada lasted, strictly speaking-, 
from 17.39 to 17().'}. During- that time trade i)y the com- 
missariat dei)artment, the IJritish troo])s ancl the Xew 
Fin<>'land traders, was carried on in British currency. 
'I'he paper money issued during the French regime 
fluctuated in value with every rumor of its |)ossible re- 
demption. It had become, in fact, an article of wildcat 
speculation. A larye (juajitity of French coina^re had 
disai)])eared from circulation durin<2- the naner delntre 

of the French ascendai 



a})peared very s 




ui)on the establishment of Hritish rule. Such French 

■.\ t\ 


M()M;V AM) HANKI,\(i 


ifi. ■ 

(•(•ins as found tlRir way into circiilatioti did y.o inostlv 
tlh'oiioli ictiiil tradr. and wcix' accepted on a .slii-litly 
o\crratcd hnllion hasis. 

When the trade of (Quebec and Montreal be^*'an to re- 
vive tliron.irh the activities of British merchants from the 
New Knuland colonies, the currency standards of these 
colonies l)e<,mn to prevail in commercial transactions. 
'I'he merchants of Quebec we.e most closely associated 
in their transactions with \ova Scotia and especially 
with Massachusetts, while the Montreal traders and tli<' 
inr dealers were most intimately connected with the 
colony of \ew York, by the Lake Champlaiii route. 

Now, the Xew lMi,nlan(l colonies were closely asso- 
ciated with tile West Indian trade; and so the Spanish 
dollar, or piece of eiyht (S reals), had come to be the 
prevailing- coinage in circulation. Through it exchan<«es 
were made with (n-eat Britain. Nevertheless, the nom- 
inal standard was the Eritisli shillino-. TJie Spanish 
dollar was eiiuivalcnt to 4s. Od. sterlinir; but owiii"- to 
tlie scarcity ot money in these new colonics, there was a 
constant tendency to overvalue it. In Massachusetts 
and Nova Scotia the customary ratinn- was .5s., while in 
Xew York colony it was 7s. (id., and at times 8s. IJoth 
of these ratin^-s were introduced by the merchants com- 
ing- to Canada. The former was })reval(.nt at (Quebec, 
where it was known as Halifax currency, and the latter 
at .^^ontreal, where it was known as \'ork currency. It 
was not. however, untd some time later that the Halifax 
currency standard was aiioj)te(l for o-overnment purpo„es. 
I'Ol. Kar!// i\v peri in tills in media of e.vchaiiffc.^ln 
18(M. the year after the establishment of civil mnern- 
ment in Canada. (Governor Murray passc(1 an ordinance 
'■for re^ndatinn- and establishing- tJie currency of the 
provhice." By this ordinance the chief gold and silver 

IllS'l'OliV UF CANADIAN .MONi/IAin' ^VS'ri.M |(!> 


ciiiiis fjunlliiir to Aiiu'ricaii coloni;!! iradi' wvw .st'j);i- 
ratcly i-altd. Of tlic sihcr coins, the S[)aiii.sli dollar was 
rated at (is., tlic l-'rciifii crow ii at ()S. Sd., and tlit Hriti^h 
sliillino- at Is. U\., the Spnnish pislarccn at Is. "Jd., and 
the French iiinepeiiiiy piece at Is. currency. 

To meet the need of IVactional currency it had heen 
custoniai-y to cut ui) small coins into hahes and (juar- 
ters, and to pass tlie sections as change. 'I'his facilitated 
fraud, so the ordinance of ITCt ijroliihited the circula- 
tion of cut money. A more successful device to meet 
the scarcity of fracti(-nal currency was the issue l)y the 
merchants of small due hills, which were good at their 
face value for merchandise of an e(iuivalent amount. 
In cases wliere the merchanls who issued tJiese l)ills 
were well known, and where die paper was honored at 
once on demand, these notes gained a more or less 
general cii'culation, and in this way met a very real need 
of the colony. 

This ])aper currency originated in French Canada, 
and the notes were generally introduced with the words 
Hon pour. Tn this way, this paper came to he nni- 
versally designated as lions, and the name followed 
their introduction into Tpper Canada at a later date. 
Without a douht these lions ])repared the way for the 
suhseciuent issue of hank notes. An enterprising auc- 
tioneer of Quehec. with no small degree of self-assur- 
ance, petitioned the Council of Quehec in 17(>7 for a 
monopoly of the privilege of issuing j)romIssory notes 
for small sums as a suhstitute for fi actional currency. 
Thi.^ ap])ears to he the first aj)plicatioti for hanking 
privileges in Canada. 

202. Shnuhinl o/rnin'ii of fjir cnjrtfiii — 'I''hf^ vatijifTo 
given hy Ckneral Murray to a numher of the coins listed 
were not consistent with each other. He purposely over- 





lii ■ 

t t ; • 





rated tlie French coins in order to draw tlieni once again 
into circulation, and retain tlieni in the country. Some 
effort was made to secure unirormity thi-ou^hout the 
colony: hut tliis was not ett'ected luitil after the out- 
break of the American rexoiution. In 1777 an ordi- 
nance was passed makin-^' the Halifax currency the 
standard money for the coimtry. 'Die merchants of 
Quehcc a?id Montreal had not l)een ahle to come to an 
agreement on this rnatter: hut, a* the outbreak of the 
American war. the (luestion had been decided in favor 
ol" the merchants of (Quebec, the Montreal traders bein<r 
suspected of sym])athizing with the revolutionists. ]Jy 
an ordinance passed in 1777 the .SiJ- Mish dollar was rated 
at 5s,, the Hiitish and l-'reneh crowns at .)> (>d. each, 
tlic British shilling at Is. Id., and tlie Spanish ])istareen 
at Is. It is intertsting to oi.Mi in this connection, 
that as compared witii tlii' standard dollar the Hrilisli 
crown was underrated to the extent of td.. with the rc- 
.sult that it disap|)cared from eiiculation. On the other 
hand, tlic I-'rench eiown was made by law to cii-culate 
at more than if was worth, and hence was in ukh-c ••en- 
eral u^(• than even the S|)anish dollar. Th'- pistareen. 
too, was by this ordinance gi\en a \alue far more than 
it wns worth, and as a result was attracted in large sums 
to the colonw I'"oi- a time it was irseful in increasin<>' 
the suppl\- of fractional currency: but lat( r it. with, the 
French crown, became a source of much trouble and ex- 
y)ense to the whohs.-.Ie merchants and tlie b.anks. The 
^old coins, too. had been ni\,.n ;i |,.n;i| value: but from 
them no h'oulilc was (■\peii<iice(l. The eliK !' of these 
"ere till Hiiiisli tiuirMa. ral((| al LI ;{s. Id., and the 
Portnuu* SI' .Inhannes comnioidy calhd ".Foe" -jit 
•i- i is. 

•Jn.'{. ('lutii-ifs ill I he I'll n; lie// nlhr / , .v,;. - -1 )iu'inu- 


the Hc'volutioiiarv War so iiiucli specie was sent to 
Canada hv tlie Hrilisli Treasury, in support of the civil 
and military administration of the country, that Cana- 
dian merchants informed the home authorities that it 
was unnecessary to ship fui'ther supplies of specie to the 
colony, as they coidd secure all that was needed l)y send- 
ini'- to Knulaiid the Treasurv l)ills which thev had 
accepted as payment for sui)plies furnished the •govern- 
ment in Canada. 

When trade with the American colonies, now hecome 
the Ignited States, was resumed, the Canadian merchants 
who dealt in international exchan<4e found that the over- 
ratiiiii- of certain coins involved them in considcral)le loss. 
They, therefore, jjctitioned the imi)erial <40vernment to 
rcmedv these evils: but no further change was made 
until the division of the colony. ii\ IT'.M, into the prov- 
inces of I'ppcr aud Lower Canada. 'IMiereujion an act 
was ])assc<l in Lower Canada, and soon afterwards in 
Lpper Canada also, pcrmittinu" slightly worn ^old 
coins to ])ass at their full face value in order to encour- 
a^'c their remaining' in circulation. The act also Icoal- 
i/i(l the new American coins, the cayle and the dollar, 
rating- them at €2 10s. and .5s. respectively. 

•20i. Difficult// of clKHi^iiii^- jiractici'. As is very 
often the case, custom did not altogether carry out the 
Itlter of the law. It still was the current practici- for 
Montreal and Lj)ptr Canada merchants to carry on 
Ihcir business in ^'ork currency. althou<ih Halifax cui'- 
rencv bad been made the standard. 'I'his is readily 
undi'rstood when it is recalled llial the li.valist mIIK nu nfs 
in I 'ppcr C'anada ( iicourayvd the merchants in this prac- 
tice. 'I'liesc I<i\alists had come frotu New ^'(>I•k. New 
.lersey and the adjoinin.u' districts (if IViinsyh ania. So 
d( < py roote<l was the ^'^l|■k euri< ncy in tlii' lnwns ami 


conntiy dislHcts of ['vpvr Caiiad;^ that oven to tlii.s (lav- 
prices arc oftt'ii (jiiotcd among the I'arnier.s and local 
dealers in ^'ork shilhims. 

Tlie orioinal York shilling, as is well known, was tlie 
:Me.\icai) real, hut in later times it Ijccanie known as the 
British sixpence. The use of York currenev was so 
wides|)read that it created a great deal of tronhle, espe- 
cially in legal srttlements of business affairs; so that 
finally in 1821, hy act of parliament, it was deprived of 
legal recognition. In Lower Canada, among the peas- 
antry, the French Hvre held much the same place as York 
currency in the sister i)r()\ ince. 

20.). Jet of /mv.— After the decimal currency system 
liad hecome thoroughly estal)lishcd in the Fnited States, 
much of the worn and dcfae, ,1 displaced coinage ^'ound 
Its way across the border lo Canada. The comparative 
scarcity of coins there, especially f„r fractional currency, 
prevented the old American coins from being too closely 
scrutim/ed. Those merchants who dealt in foreign trade 
were cone. rned. for the most part, with the state of the 
gold coins and their exchange values. Thus, an act 
|)assed in ISOH dealt only with the exchange relations of 
gold currency. 

During the perio.l following the liritish occupation 
of C' up to ISnS, the imperial government took 
ycry little interest m the monetary system of the colony. 
The British aulhoriliis n ,,uired the Canadian adminis- 
I'-'ti"" to keep its acrount in the sterling standard of 
Knglan.l. Neverthel. ss. ||,.. sjurie employed i,, the pay- 
iiKiit of thr tro.»ps and m meeting oth,.,- expenses was 
not as a rule Hrifish coinage but Spanish dollars, rated 
|<l ^s. (Id. each. The S|,anish dollar passed in trade. 
'™;' ■• ••' •'^- '^" ii'''' *•!•■ -'idler r.reived a premium 
ol (5d. currency on each .loll,,r. In ihos the pninium 

v^ ^^ 


w;is reduced, the imperial government thei'eafter 
j)ayiiig out tlic Spaiiisli dollar at the rate of -is. 8d.. 

•20iK Dnid funvlions of the carli/ Canadian mcr- 
iJ'.ant.-' 'V\w. large merchants, especially in Western 
Canada, not only carried on the import and export trade 
of the colony but dealt in 1'orelgn exchange as well. As 
a matter of fact, nearly all exchanges were made through 
them. They extended credit to various persons in nearly 
every line of business and honored drafts drawn on them 
both for goods and money. They conducted the foreign 
exchange bus-ness through their agents in Montreal, 
who procured such foreign bills as they recjuired — most 
of them from the civil and military administration. The 
large import houses of Montreal in reality carried on a 
banking business with the merchants of the ujjper prov- 
ince. They received cash dejjosits, made payments as 
ihey were directed, and extended credit to be met in the 
future either by produce or cash. This combination of 
functions gave them very extensive power over the dis- 
tricts tributary to them, (governor Simcoe. of Tpjier 
Canad'i. recognized this, and so sought to displace the 
merchants by establishing grain and Hour stores — the 
torerunners of the modern elevators. These stores were 
to be under governmental control and super\ ision. The 
Lords of Trade in (ireat JJritain. however, vetoed .Sini- 
coe's plans. 

•JOT. Karlji d((din^s in lOrii:^!! crcZ/rw^'-r.— Canadiai* 
trade with the I'niled States had been greativ stimu- 
I.ttcd after Jay's Trcaly of IT'.U. Mndi of tlie Ameri- 
an produce I'lom the West found its \v:\y to the l\uro- 
pcan market through Canadian merchants. The Hritish 
uovernment was obliged to purchase large supplies, too, 
for the garrisons, which they paid for with bills drawn 







upon the Treasury in Enf^iaiul. As a eonseqnence of 
all this, at times niueh Canadian euneney was sent to 
the neif^hhoring states. On tlie otlier hand, hills drawn 
on IJiitain were often in exeess of the loeal demand 
while they were at a i)reniium in the rei)uhlie. This led 
to a profitahle e\elian<^e Ousiness. es{)eeially hetweeii 
Montreal and Xew Vork. The eneouraninH' sueeess of 
the liank of the United States, founded hy ^Vlexander 
Hamilton, together with the extensi\e exehan^e liusiness 
just deserihed, led to a demand in ISO? for a Canadian 
hank. Jiut the rapidly inereasino- fi-iction hetwcen the 
United Kin<^(lom and the United States prevented 
the pi-oposition from l)eino- carried out, as war was de- 
clared hy the repuhlic in 1812. 

208. fl'ar (if isi j /// Us nUdion in Cdnad'uin finance. 
— .Just hefore the War of 1812 the Canadian grain and 
Hour trade was in none t 'o prosperous a condition. This 
was ehielly owin^' to the fact that the British Corn Law 
had j)rovided for a sliding- scale of duties, which had 
meant for Canadian cx|)orters low prices and lon<i^ 
credits. Hut the outl)reak of war led to large expendi- 
tures in Canada hy the imperial <;o\xrnment. In nor- 
mal times, the pui'chasc of supphes in Canada would 
h,i\e heen met hy hills of iwehange on the Hritish Treas- 
ury: hut. there heing little specie iii Canada now with 
Mhich to j)ui'chase them, and it heing too risky to im|)ort 
large supphes of specie during the war, the Jiritish 
goxcrmiunt arran^dl \\'v the issue of ai-mv hills. These 
wvvv simply orders on the British '1' casury for con- 
venient amounts of standard uioniy. 'I'hc v were not, 
therefore, paper money in the ordinaiy sense of the term. 
They wvw designed simply as a convetiicnt means of 
supplying l{i-itish moni v to Canada with(!ut ninnlng 
the risks incident to ^var. 


iirsTORv or canadiw monetary system 175 

209. ^Utitiidc toicard pajnr currciicif. — At first, the 
l"'reiic'h Canadians were very suspieious of the new 
|)a])er currcney. recalling' as th<y did their unhappy 
e.\[)eiienee with the notes issued hy the French govern- 
ment hefore 17."5!). They therefore hxst no time in con- 
\ertinf>' the new notes into specie whenever they fell into 
their hands. l?ut .soon they gained confidence in the 
new i)aper money, which ])erformed its functions with 
the greatest elhciency. These notes hore interest and 
those of the larger denominations were convertihle into 
liills of exchange drawn on the IJritish Treasury. Cer- 
tain small denominations hore no interest and were 
jiayahle on demand at the army hills otHce. Soon nionev 
became plentiful throuj'hout the colony. The war, as 
far as Canada and the i'e])ul)lic were concerned, was 
really a tame affair. There were a few skirmishes 
wiiicli Canadian and iVnicrican historians have glorified 
until they have hccome great battles. It has often been 
noted that, generally speaking. Ciirat Hritains wars 
have always meant high prices and prosj)ei-ity for Can- 
ada. It was ji'stingly said that the litiugy of Canada 
contained a fei'vent |)rayei- "for a bountiful harvest and 
a bloody war."' 

The ariny bills. ]u)wcver, althongli tlicy did serve as a 
medium of exchange, were not designed as such. In 
i( ality. they were simj)ly bills of e\c-hange used to pay 
Canadian merchants for sup|)lies furnished the military 
administration. These bills w* -e sold throughout the 
wai' in Xew l''nghmd cities, where tiny found ready 
biiyei's; for. as is will known. New Kngiand was abso- 
lutely oj)posed to this useless war. 'I'hese notes fatnil- 
iari/ed the Canadians \\ith papei- currencv. and i)avc(l 
the way for the successful launching of se\cral banks in 
the tiear futmx'. 





210. Origin of the ^rcat chartered hanks. — In 1815 
and the following year an attempt was made to secure 
a charter for a CanacHan bank. It was tlie general 
opinion that a provincial bank whicli had the power to 
issue paper money would greatly aid the trade and 
commerce of the country. Its notes would take the place 
of the retired army bills. In 181<> and again in 1817 
attempts were made to secure })ank charters; but in 
both tiiese years constitutional difliculties led to the pro- 
rogation of the legislature before the bank bills were 

All efforts to secure a charter from the legislature 
having failed, several Montreal merchants and others 
who were interested decided to estal)lish the bank as a 
private corporation. On May 17, 1H17, the Articles of 
Association of tlie Bank of Mor.treal were ado])ted; 
and ten days later they were published in the Montreal 
Herald in separate form. It is interesting to observe 
that Americans subscribed a large portion of its early 
caj)itnl. and several of its chief oflicers came from the 
Cnited States. 

211. Alexander II(imUt(fn's principles adopted.— In 
its essential and most characterislic features the Bank 
of Montreal paved the way for subse<juent banking 
legislation and ])ractice. To this day the central facts 
of Canadian banking are founded on tliis eaiiv ex])eri- 
nient. It is of more than ordinary interest to note 
that the Canadian banking system was founded )n the 
j)rineij)les hiid down ir; fjie First l?ank of the Tnited 
States a bank which was established along the liius 
advocated by the great American statesman Alexander 
llamiltoii. who was tlu' first Sicrctary of tji(> Treasury. 
In I hi' following year t]n'e(> other ])rivate banks were 
cstablislud in Canada. These were the (Quebec Bank 


at; tiic Bank of Canada at Montreal, and the 
Hank dC Upper Canada at Kiii'^rston. All of these fol- 
lowed, with slioht nioditications, the articles of associa- 
tion of the Bank of Montreal. 

212. Articles of association.— The Icadinf? featnrcs of 
these articles were as follows: The authorized capital 
nf the hank was £;2.5(),()0() cin-rency, or -"i^l/JoO.OOO. TJie 
shareholders were liahle only to the amount of their 
suhscrihed shares, the douhle lial)ility clause l)ein^- intro- 
duced much later. The bank was 'forl)i(lden to deal in 
real estate or to lend money on mort,!jfaoes, althou^i^di 
niortga<res mi«,dit he taken as collateral security. Jt 
was i)ermitted to deal in promissory notes, to receive 
dei)(),sits, and to huy and sell hills of exchan,i,''e and <,n)ld 
and silver bullion. It was i'urther provided that the 
total liabilities of the institution could not exceed three 
times its paid-up capital. The directors were oblioed 
to submit an amiual statement to the sharehoklers, 
c.xhibitino- the total assets and liabilities of the bank, the 
amount of the notes in circulation, bad or doubtful debts, 
and the surplus or profit. The bank was permitted to 
establish branches in other parts of Canada. 

A numl)er of well-to-do French Canadians took 
stock in the bank, and entrusted it with their deposits. 
^'et the country people were somewhat dubious of the 
soundness of the institution; and therefore (juickly 
turned in its notes for cash. In this way the elasticity 
of the notes of the liank of Montreal was retained. 
In Tppcr Canada, on the other hand, the banks received 
every encouraoement. and their notes t'ound wide cir- 
culation. TTence they sidlVred more severely in time 
"f crisis, as many notes which bad been, lon.'j- !>i elrcii- 
lation were ])resented for payment. It was not until' 
1822 that the three Lower Canadian banks— the Bank 

C— VII— 12 






of Montreal, tlif (:^iu'l)cc Hank and the Bank of Canada 
— became regularly chartered institutions under the 

213. First hanhs of Upper Cdiiada. — In Upper 
Canada the need of banking facilities was also felt. 
Ini])atient at the delay of the government the promoters 
decided to establish a bank on the model of the Bank 
of Montreal. Accordingly, in 1818, the Bank of Upper 
Canada was established. The capital stock of the new 
bank was fixed at tfJo.OOO currency, or .$(;2.),()()(). Thus, 
in .\pril, 181!), the private Bank of U])per Canada 
opened its dooi's, and soon found wide circulation IV.r its 
notes. As a matter of fact, following the army bill ex- 
pei'ienee of the War of 1812, the British people were 
much too ready to accej)t the notes of the new banks. 
i\t the same time Upper Canada was being flooded by 
^Vmerican bank notes. Soon after, in 1821, the Char- 
tered Bank of Uj)per Canada received its charter from 
the legislature and soon afterwards began business. 

A'ery soon afterwards the Bank of Canada at Mon- 
treal and the JJank of Upper Canada at Kingston were 
<ib]iged to close their doors. The prosperity of the 
colon v suffered a severe shock after the lontr and ex- 
hausting Xapoleorn'c wars. The three Canadian banks 
at Quebec. Montreal and ^'ork, however, became thor- 
oughly established, and ad()j)ted a conservative ])olicy 
in the discounting of notes and in the issuing of their 

214. Allcmpts at currcncji /'(/or;;?.— Shortly after 
1822 an imporlant expirimenl was attempted in cur- 
rency I'eform. The Hiitisji government, owing to the 
dillieulfies exjjerienced durinu' the suspension of specie 
payments at the time of the Napoleonic wars, h. d de- 
cided, in 181(>, to i)laee its curiency on a gold ijasis. 


Silver coinage was made a token currency by raising* its 
face value soniewliat aho.e its bullion value and limiting- 
its legal-tender properties to iOs. Tlius, silver was main- 
tained as a simple t'raetionad currcnc}'. Tbe new regu- 
lations operated so successfully that the Bank of Kng- 
land resumed specie payments in 1821. 

The IJritish government resolved to introduce the 
gold standard into all parts of the emj)ire, beginning 
u ith tile more important colonies. It was proposed, in 
18*J.5, that for Canada the sterling standard should be- 
eome universal; and, fui'tlier, that the British siher and 
copper coinage should l)e employed I'or all moderate 
payments; while larger payments should be made by 
ineans of bills of exchange issued at the fixed rate of 
.'J per cent per annum. In other words, £100 sterling 
payaljle in Britain would be exchanged for £10.'J ster- 
hiig payable in the colony. It was exi)ected tliat British 
silver and co])])cr c(Mns would remain in the colony and 
furnish a permanent medium of exchange. It was not 
thoughi, ho^ ver, that the Spanish silver dollar could 
be dispensed with at once; so it was provided that for the 
future, it should be rated at 4s. 4(1., with other silver 
corns in like projiortion. 

•J1.5. Iicsiilt (if ciirroici/ reform. — As a result of all 
this, an order-in-council was sent to the British Xorth 
American colonies, among other;, virtually making 
Hiitisli silver an unlimited legal tender and liritish 
copjier coins legal tender to lOd. James Stephen (after- 
^\ards Sir James), legal adviser to the colonial otlice. 
gave it as his o])in!on that ITi*; Ma_)esty had no |)owfr 
bv order-in-council to change the ratinjp of coins fixed 
\)v the Iro'isilaturo of the colon.ies. TTis oninion. b.owever. 
was overnded by the attorney-genend and solicitor- 
general. ^Vhen Lord Dalhousie attemj)te(l to carry out 



liis instructions lie I'ound the lc<4islaturc of Lower Can- 
ada unalterably oj)j)()se(l to it. They simply shelved 
the whole matter \\ hen it was referred to them. 

In Uj)j)er Canada, the people and the legislature de- 
clined to ado])t the Hritisli monetary standard. Al- 
though the otHcial standard was the pound currency, 
the people had become accustomed to doing business 
in dollars and cents. The bank notes in both provinces 
were, as a matter of fact, printed in the American 
standard. The F|)j)er Cana.dian legislature, in response 
to the message of the lieutenant-governor with the ac- 
com[)anying documents of the Treasury, simply raised 
the rating of the British silver and copper coins. The 
crown was rated at os. Dd. instead of .5s. 6d. ; the shilling 
at Is. 2(1., instead of Is. id., and lOd. in British copper 
was made the e(|uivalent of Is. currency. 

•JK). Kxchdh^c i\:iih the United Kingdom. — The 
British government was thus frustrated in its attempt to 
alter the legal basis of the Canadian currency. In an- 
other way, however, it had conunand of the situation 
through the exchanges. The Treasury now sent out 
t3(), ()()() sterling, in silver, and a consi(lcra})le sum in 
copi)er coin. Instructions were sent to Canada that 
henceforth supplies for the imperial officers were to be 
stated in terms of sterling money. Payments for these 
suj)plies and also ])ayments to the troops were to be made 
on the same l)asis. Whenever the Spanisb dollar was 
enjployed it was to be thereafter rated at only 4s. 4(1. 
Payment for large sums might be made in specie on 
this basis, or in bills of exchange drawn on the Treasury 
in London at the rate of €100 sterling for £I03 of 
the eniitract. l^it owing to the constant demand for 
l)il!s of exchange l)y the Canadian meivhants, and be- 
cause of the tleclaration of the government that these 



liills would he issiud tni' Hrilish sihcr ;il li per cent 
|i!vmiuin, the IJritisli eoius were eonstiUitly witlulrawn 
t'lODi circulation to purchase bills of exchange. As a 
ic suit, the very machinery which was to ensiu'e the cir- 
culation in Canada of liritish coina<;e resulted in vir- 
liially dri\ing- it out of use; and the iield was left to 
the i)aper issues of the- Canadian and American banks, 
supplemented by French silvci* in Lower Canada and 
American and Si)anish siher in Upper Canada. It 
was sof)n discovered, too, that the premium of 3 per 
(■(lit on IJi'itish bills was too high. It was cheaper to 
( xport the IJi'itish silver directly, which was done. As 
a result, the military authorities were forced to receive 
,ind pay out little else than Spanish and ^Vmerican 
dollars, and fractions thereof. In conse([uence, the Treas- 
ury reduced the ])remium on excha.nge from 3 to ll o 
])er cent, and bills of exchang( c'e more resumed 
their place as the standard means ot laking payments in 

-17. Canadian currnici/ in tJic second quarter of the 
iiinefeenlJt ceuturi/. — The failure of the attem])t .f the 
Hritish o()vermnent to establish the sterling standard in 
Canada revealed ceitain peculiarities and anomalies of 
the Canadian monetary situation. The Canadians had 
adopted a ])urely tv.inentional standard, the Halifax 
pound. There was no coinage corresponding to it; and, 
therefore, it was necessary to utilize as a medium of ex- 
change such foreign coins as were available in the course 
'if trade. Thus, it was found necessary to admit to un- 
iimited legal tender a variety of coins over the issue of 
\\hich the Canadian Icgislatiuv had no control. It was 
Mot iiossiblc to nlace all th.ese coins on ti uar ^^■!tll each, 
other according to their real value: for that would have 
involved various awkward fractions most inconvenient 

i i 

' J 






i'or tiRir rapid circulation. M()rc()\cr, exact ratinfj^s 
could lia\e a|)|)li(.(l only to coins of lull weight, and 
unaliVctcd I y I'atcs of cxclian^'c. .\s a matter of fact, 
British and Anicrican coins in ])articular (luctuatcd in 
value with the I'ate of exclian^'e on their respective coun- 
tries. And, moreover, except for the <4dld coins, the 
ofl'icial I'atin^' applied to them was hy tale, not hy wei<4"ht. 
As a result, it was made prolitaMe to import and retain 
in circulation all manner of worn ;nul defaced coinaj^e 
from every country with which Canada had coniniercial 

•Ji8. Varichi of coins '■ircnJ(iit(L--The most common 
of the smaller coins in circulation was the Spanish 
])istareen. the most worn and defaced, too, of all. It 
had been discarded hy the Americans when they ado])ted 
their national cui'reney. It ])assed current in Canada 
for Is. or 20 cents, whereas in the adjoinin<i' states it 
did not ])ass for more than 17 cents. In 1830 it was 
reduced to lod. in Lower Canada and excluded from 
the list of legal tender in l'|)i)er Canada. For lack of 
small chanye. howe\er. it still contimied to circulate. 

Durino- the second (juarter of the nineteenth century 
the Canadian curi'ency broker cari'ied on an extensive 
and j)aying business. His ollice was a veritable curios- 
ity shop, exhibiting, as it did, the remnants of several 
national currencies in the last stages of demoraliza- 
tion. Only the chronic scarcity of coinage in times of 
peace enabled this motley assemblage of coins to ])ass 
current in the market-place. The copper currency was 
worst of all. I)eing composed of discaided British half- 
pence and farthings. Even at that, the suj)ply was de- 
ficient to meet the needs of the counti'V. Private mer- 
chants Ix'gan to imjjoi't su|)plies for themselves, and 





1 int( 

o general circulation. 


Other attempts were made from time to time to induce 
the colonies to adopt the sterUng standard, hut with no 
success. The trend of mercantile and bankin<^ usa^e, 
as well as that of popular sentiment, was distinctly in 
favor of the decimal currency of dollars and cents. Dur- 
ing the period from 1823 to 183,5 there were maiiy 
rumors of proposals for improving the currency, and 
especially of increasing its volume; but none of the i)ro- 
j)osed measures could command the assent of l)otli 
branches of the legislature in Lower or Upper Canada. 
Thus matters drifted throughout the thirties, until the 
political troubles after 183G paralyzed all proposed im- 
portant legislation. 

219. Canadian currcncij after the union of Upper and 
Lo-u-er Canada in 1S4 L— -The political crisis of 1837-40 
diverted attention from the reform of the monetary 
system of the country, although there was evident need 
of its being effecte(L There was great dearth of ca{)ital, 
too, for banking purposes, as was made evident by the 
extension of the term which had been given to certain 
banks during which they were obliged to secure fimds 
for various stock issues. 

The British authorities in 1840 advised the leifisla- 
turc of l"^p{)er Canada to prohibit the issue by the banks 
of notes of less than £l each. This ad\ ice. however, w as 
ignored by the legislature. The need of currency of 
the smaller denominations was too apparent. As has 
been explained the Halifax currency was purely an ar- 
bitrary nionev of account. The Canadians, therefore, 
had sound enough reasons for retaining bank notes as 
low as one dollar. The only coins of nearly ecjual value 
to these dollar notes were the Mexican, Spanish, and 
South iVmerican dollars, and those coined in the United 
States. In practice, Canada was dej)endent for her sup- 



• 4 

- i 





])Iy of silver coin upon the Pliihuleli)liia Mint, and upon 
iniijortations Ironi the I'nited Kingdom. Tlie pound 
sterhny' was onhnarily rated at il 4s. 4.d. currency. 
In Ipper C'aiuuhi the IJritisli shilhng had long passed 
lor Is. ;>(]. currency, while in the lower province it was 
rated at hut Is. Id. The very close trade relations be- 
tween Canada and the United States, and the consider- 
al)le note circulation the Canadian banks enjoyed along 
the border, made it essential that the monetary media of 
the two countries should be as much alike as posoible. 
The familiarity of the jjcople with the decimal system, 
and the rei)lenishing of their stores of specie with Ameri- 
can coin, pointed to tlie eventual assimilation of the 
Canadian currency system to that of the rnited States. 
'J-JO. Ls.stic of .short lime fi-ovcriDniuf (Ichcnturcs in 
7,9;,9.— The revival of trade alter the crisis o. 18^7 had 
bc( n s' Av in bcoiunino-, hut by ISU there was a very 
.«.;•( IK ral inipi'o\ mu iit. and a decided demand for new 
capital. The movement t.)ok the usual form of economic 
expansion, although in Canada the develoi)ment i\\ou<r 
speculati\ t' lims was carried io no such extremes as in 
the British railway mania. Shrewd observers, however, 
tliought the imj)ortations )f 1SJ.7 excessive, and were 
of the opinion that the great increase of staple exjxirts 
would not likely endure. Their fon bodings ])rove(i to 
be only too \V( II justified. The severe commercial re- 
action in l'".iigl;ii!(| ill IS 1-7 made its cM'ccts evident at 
once in Canada, especially ii. C;uiada Kast : for it was 
the merchants of Montreal and (^u< Ixc. v.hosc connec- 
tion with HritaMi was closest bv reason of their domi- 
nance in the export trade, who first felt the blo,>-. There 
were a great number of commercial failures; a great 
r-Uing off in the export trade, csp^ -nilly ii: ^hipmcnt^ 
of timber, wheat and produce; a heavy reduction of dis- 


nil lilts made by the banks, and a sharp contraction in 
tlitir circnhition. 

So <4reat was the f^overnnient's need in 181.8, and so 
hopeless the prospect of borrowino- money in Kn<4land, 
tliat resort was made to an issne of debentures. l)earinir 
interest at ('» per cent. Tliey were of the form and ap- 
|)(aranee of bank notes and were issued for sums as low 
.IS $10, were payable in one year with interest, and made 
leeeivable for jjublic dues. A ste}) not contemplated 
hy the act was the re-issue of the j)ai)er after it had 
\kv\] paid into the i)ublic eliest. A total issue of £12.).- 
{100 was authorized. In the foilowinn- year the <iovern- 
iiicnt obtained authority for a new issue, in debentures 
for less than tlO each, payable on demand or after a 
tixed date which the <4-overnment mi^ht set, with or 
\\ithout interest. As it happened, the authority thus 
f^ranted was not used, .and the debentures of 1848 soon 
(iisap])eare(l from circulation. 

•J"J1. Crisis of /SoT. — Trade revived a^»'ain in the early 
lifties. until by 18.)7 there was a veritable boom in 
tiade and commercial affairs. .Much of this meant 
vtimd and lasting- progress, but there was also along 
with it wild s|)eculation in l;ind. Hut in 1H.')7 the har- 
\est was a virtual failiu'e: and added to this, urain ])rices 
were low. Then, to make matters worse, came the finan- 
(ial crisis in (ireat Hritain and also the I'nited .States, 
riie Canadian banks had extetided loajis to Ijorrowcrs 
piincipally ihiouuh note issues. 'I'hey w<re now cori- 
Ironted with demands for note r((l( inplion: and. there- 
!'>re. .'is a measure ol' safety .'ind nr<(>auti(in curtMiled 
their discounts. Within the veur their circulation had 
fallen to two-thirds its volume in 18.")r); juid discounts 
nere cut down in corrcspondiiiM' decree. ,\l once there 
.ircKse u demand from both the tradinj'- and the a<n-i- 



cultural classes that the ^rovernnieut should furnish a 
circuiatino- niediuni of e.\chan<^e, since the banks refused 
to meet the denia. ds made upon them. The banks 
were simj)iy safe^iiarditi^j- their own interests in ado])t- 
in<r tiiis eo"servative policy: l)ut there was no doubt that 
the sudden and violent contraction of a <Treat part of 
the circnlatino- medium of the })e(,j)le did seriously in- 
jure the industries and trade of tlie colony. IJut it 
was not until IHCO that a scheme |)ro\idin^' for govern- 
ment note issue was seriously considered. 

'2'2'2. Karl 11 al Ion pis at i^ovcniDwnl note issuer.— It 
was in this year 'IH.jT) that legislation was prssed. 
bec.<minw' effective January 1. 18.58, whereby I lifax 
cunvncy ceased altogether to be the ofHcial or statutory 
m'Miey of account. Thereafter Canadians reckoned in 
dollars and cents, the decimal systi'in of ciu-rcncy l)ein<,' 
adopted. This, of coiu'se. \vas simply takiny- formal ac- 
count in law (.f what had \kvu done for years as a 
fact. The Hritish .so\ creiyii was continued as le^'al teii- 
dci- for S4.8(),-;. and the American ea^lc as coined after 
18.'}! was made le^al tender for SIO. 

'2'2:i. Mr. Cinlfs pJnu.- In 18t;o Mr. A. T. (ialt. the 
(inanci- minister, devised a remedv wliich he thonjjht 
uonI<l cure the monetary ills of the countrv. Ills plan 
was "to separate ciiiri iiey IVom banking"; his purpose, 
"to J)k' tli( i-nrreliey of the country on a perfecllv :,ui'c 
and salV' fooijuM- |,y separaiing li IV:)m the banking 
interests, and by removing' it from the possible sus|)icioii 
of Ining all'icttd by political exigency." \\r pro])oscd. 
therefi-re. that no paj)er money be issued except in the 
credit of the |)rovince: and sicondly. thai such notes 
of the provinc<- should be a legal lender and rede( niable 
in s|)ccii . iii v\..ijio ii\ {lit* tnnximum Issue at >^n>,- 
0(M),()0(». ;ind ha\e the notes jint into eirenlat ion by the 
banks; the notes could be obtained bv lb< ni from llu 


Treasury on deli very of one-fifth the amount of the 
notes in speeie, one-tiftii in o()\;ernment securities, and 
i)y ^ivin<jf a ])rivile<^ed hen upon their assets for the 
other tliree-fifths. The banks would pay the govern- 
ment for the privile'i'e of eireula^^^i'fif notes up to half 
their paid-up eapital stock, at the rate of 8 per cent ])er 
aiHiuni: and for notes in excess of half their eapital at 
the rate of 4 i)er cent. S])ecie and securities so received 
the Treasury was to jiold as a reserve ao-ainst the 
notes. Needless to say, none of the chartered hanks 
slunved any eagerness to exchange a franchise to issue 
notes at no cost beyond that of ])rinting them, for a 
right that would cost tluin 3 i)er cent on i)art: of the 
notes taken out, as well as the current rates for the specie 
de])osited and for the cash ])aid for debentures with 
which they were to piotect two-fifths of their circulation. 
So, iu the face of liostile criticism from all sides, the 
govirnment withdrew the measure. 

'2'2i. Pnniticial iiolt' issues.- In 18(')(). however, the 
))lan was once more brought to the front. 'I"he floating 
debt of the piovinct' alone amounted tt) ov( r .*^.").()()0.()()(). 
Of this. >>•_».•_'.")().()()() was owing to one bank, and that 
bauk was pressing for payment. The legislature, in an 
altemi)t to secure funds, finally pa^sed an act in this 
vear. which authori/ed the issue of not more than 
.^H.(M)().()(M) in ;'rovincial notes: tluy were made ])ayable 
on demand in specie, cither at Toronto or Monti-e;d. as 
the notes mitiht be dated. Tbev a fiill tender 
except ;il tliese Iwoolliees. Tlie go\(rno|--in-couneil was 
authorized to ni;ik( ari'angements with an\ ban!^. tliat so 
wished, to surrendt r its right of noti' issue; such hank, 
however, retaining the right to icsume its issue privi- 
leg-es upon gi\ ing three months' notice. 

N'arious inducements were oll'ered the l)anks to g( t 
IIkui to vacate the lield, in tills particular, in favor of 



1 » 

I .,,_4- 




the governnifiit. Ilowtvtr. only one institution— the 
IJank of Montreal -pro\e(l willin--' evtn temporarily 
to surreFider the rioht ol' note issue, and to undertake 
the eirculation of piovincial notes. The provineial note 
issue was. foi- the time bein^y". the liank of Montreal's 
favorite seheme: for. so far as this particular bank was 
eoneerned. the first ed'eet of the measure was to li(iuidate 
Mliat had bcni a distinetly inactive asset. This was 
done by convert in«r tlie loans which the bank had made 
to the i)r()\ ince, and its investments in ^•overnment de- 
bentures, into |)rovincial notes a\ailablc for use in any 
kind of excliannc. It was provided in the act that to 
such banks as suri'endcred tiieir riyht to issue notes, and 
w ho withdrew their notes from circulate-' a year, 
compensation would be i)ai(h until tlu );ry of their 
charters, at a rate not to exceed .■> ]ht cent per amuim 
upon (lie nmoiint of tiieir eirculation on A])ril ;J0, 18GG. 
A commission of one-(|nai-ter of 1 per cent was to be 
paid every three months to each bank circulatinir 
provhicial paper instead of its own. Hanks relincjuisli^ 
inu- issue ))ri\ iien-ts wxw fui'lher exempted from the 
obliu-ation to hold one-tenth of their paid-up capital in 
l)rovincial (h 1 . ntures. and were permitted to exchanu-e 
such (hbeiiiuics at |)ar for pro\ incial notes. 

Tile LfoNciiiment. on the other hand, was to hold a 
reserve of -JO per emt in specie, against its leoal tenders, 
for the aiiioiinl in circulation up to s.""».(M)().()()(); and 
aoainsl amounts in excess of tiiat sum •_•.-> per ecnl in 
specie until the whole ;!uthori/((l issue of SH.OOO.OOO was 
i-cachtd. Co\er of piovineia! debentures to the full 
amount was rc(|uired for the di.'lerence between .specie 
reserves and notes ontstanchnu-. 

It has .sei unci will wniiji wiiij, to (spjain t!iis system 
somewhat in d( tail: for while no banlv, sa\e the one al- 
ready niditioned, accepted the oHVi of the i^ovi rmiK nt. 


yet the sclienie w".s an important one. In essence, it 
involved the principles since ac'opted m issuing- Domin- 
ion Government notes. These were issned alter the 
confederation of ISC.T. Allhon^'h the terms of these is- 
sues have been modiiied from time to time, yet tiie un<ler- 
lyin^r principles have always been tlie same; tlierefore, 
they may he very easily and l)rielly described. 

•J2.). Dominion notes for IxinJyntii- reserves. — In 18(58 
an act was ])asse(l declariri''- tlic ])n)vincial notes of IHCO 
to be Domim'on notes for w hich the Dominion alone was 
to be Jield responsit)le: and, further, continuing the i)ro- 
visions first enacted in respect of this issue. Authority 
Mas o'iven. also, for the estahlisliment of branches of the 
iveeiver-^enerars department in Mont.eal, Toronto, 
Halifax and St. John, for the issue and re(lem{)tion of 
Dominion notes. Tntil the i.iiification of the curren- 
cies of the vai-ious provinces, note^ ])ayable in Halifax 
were to be issued at the rate of S.> the pound sterlin<,^ 
and were to be le^^^al tender only in \ova Scotia (.'U 
\'ict., c. Kl). 

In the revision of the bank act in 1S70 i:V^ Vict., c. 1 1 ) 
it was i)rovided that each bank shouhl hokl usually half, 
and never less thai» one-Miird. of its cash reserxe in Do- 
minion notes. In s<. far as such notes held by Ww banks 
were not covered by specie, the pro\ ision nierelv meant 
a foi-ced loan without int( rc^l to tlu' novcrtimcnt. Sir 
I'rancis Ilinck.s. who was tluii linance minister, to all 
objections merely replied lliat be was oblined "to con- 
tend in the interests of the public at laru-e that they 
were entitk'd to some share in the j)roiits of lireulation." 
This j)oliey, sulijected to mudi criticism then as now, 
has !)een maintained to the present day. 

Sir i'rancis llincks, by ji finlher act (.'{.'{ \'i(t.. e. !») 
considerably enlar^i'd the yenend circidation of D(»min- 
lon notes Iiy caneeliii'4' tin pnvik^^e of larger issues than 





$t l)y tlic l)aiik.s. The ai-raiioenicnl iV,!- isMic and rc- 
(lcn)])ti()ii l)y one of the chartered hanks, in f'(»ree since 
18()(), was l)n)u<iht to an end; and the nianafifement of 
the <rovcninient cii'cuhition tnnied (ner to otKcers of tlie 
^oveninient. OfHces of issne and redemption branches 
of the receiver-f'-enerars (lej)art?iient were oj.ened in the 
provnieia! caj)itals. ^Vnthority was ^/wcn to increase the 
wliole issue, hy not more tlian a miJHon at a time, at 
intervals of not k'ss than three months, to the total of 
.$(),0()0,(K)(). iV^ainst tlie circukition outstaiuhn^. the re- 
cciver-fTcneral was ol)h<.ed to hold s|)eeie and Dominion 
del)entui'es. The del)entnres were not to exceed 80 per 
cent of the circulation: and ihe specie, as a rule, was to 
cfjual •_>.) pel- cent of the debentures (20 per cent of the 
circnlalion ). and was never to l)e less than 1.) per cent. 
Issues in excess of were to be covered bv 
specie, dollar for d(.llar, and of notes so covered tlie 
issue to any (juantity necessary mioht be undertaken. 

•22G. Later h^ishilion mnrcniin;^- Dominion notes. — 
This measure 'to regulate the issue of Dominion notes" 
was intended to rejjroduce that |)art of Peel's act of 
1S41. which established a?i issue department in the Hank 
of KtiM-land. Sir Francis Ilincks believed that 'the 
functions of the issue (le|)artment should be automati- 
cally confined to the exchange of oold for notes and 
vice versa: that an amount can be established that way. 
with pciieet safety, to be issued upon public securities, 
and all beyond that fixed amount, in u(,i,|;' 

In 1H7-'. till' government beini; in need of funds, it M-as 
provi.lrd (.-{.J \'ict.. (• 7! that excess of issue over 
JfD.OOO.OOO miu-ht be permitted ai-ainst -rold holdin"-s n\' 
hut 3.5 per cent, 'i'he Liberals, who came into power in 
i:-^!"). chauired tjiis renuiation {HH \iet.. c. .5) to .)() per 
•'•■"< i" ,U'»M l''>r the amounts outstandiny- between 
5f<J>.0(M).()()() and sr.'.uoo.ouo .ni,| ,|ol!:,r for dollar a<.ainst 


circulation in excess of .'^TJ.OOO.OOO. .\,s the Dominioii 
(Xjijuuled, additional branch oflices of the vecei\er -i^en- 
( lal's department were oj)ened in the other prox niees. 
Ill 1 880 the limit of issue against specie and debentures 
was extended to .$'J().0()().()0(). and the specie reserve re- 
(|iiired a<^ainst anything- U-ss than that sum reduced to 
].") per cent; wnile. in addition. 10 jjir cent of the 
s-_'().000.000 was to be co\ ered by del.ientures of the Do- 
minion guaranteed oy the government of the Fnited 
Kingdom ( 4.'J \'ict., e. l.*}). Thirteen years later an 
,i(t was |)asse(l (.'{ Kdw. ^'II. c. Ui) which raised the 
amount which \vas to be but partly co\e!'ed in gold and 
Dominion debentures to .'<:JO.O()0.0()0. In late years the 
Dominion goveinment has held a very large amount of 
Ui'ld as security for the circulation in excess of 
s.SO.OOO.OOO. The circulation of the notes has expanded 
\\ ith the demand for them bv the banks, thev having been 
ii(|uired by law to hold 40 j)er cent of their reserves in 
Dominion go\'ernment notes. The problems arising 
from this will. howe\ei-. be fullv discussed in Chap- 
ter XX XI. 

227. lii'siill (,f Sir rrancis Ilinchs Ic-'.slatmn.— The 
Kgislation which was cai-ried by Sir l-'raneis Tlincks 
lias resulted in gi\ ing the Canadian Treasury some 
small j)rofit in its note issues. Tluvse notes have been 
issued in the I'nilowing denominations: 25 cents. $1, $2, 
>^K $5, $.')0. J^IOO. s.)00. and $.).000. The banks 
are not jiermilled to issue notes for less than ><.'), but the 
fi<l(l ai)ove thai sum has been \ irtuallv liTt to them, the 
larger Dominion issnis Ik ing usid inalnK- as part of 
Mie banks' reserves and i'or cleai'iiig-house settlements. 
As a result, since confederal ion. Canada has affoivlcd 
the rather uni(|ue i\amj)lc of eonilicting theories and 
jM'inciples operating side by sidi — those, namely, of the 
hanking and currencv schools. 



:\ro\F,v AM) n.wKixG 


228. Uniform cum nc// in ('(tinidd.— ln 1871 tlie fed- 
eral j)arliar)K'iit j) an act (.*U \'ict.. c. -1) re.spectitin' 
tlie eiirreiu-y, wliieli <>ave lo eaeli province of the Do- 
minion a nniforni system. The sinn-le .rold standard 
Mas then adopted, hein^'- that of the British sovereign of 
the weight and fineness ])i-escrihed hy the laws of tlic 
T/nited Kingdom. The sovereign consists of 12.'J.271. 
grains of stanihird, or 1I,'3.()()1 grains of pure gold, the 
slandai'd gold oi' (ireat Britain l)eing DKJ.OOH fine. It 
was enacted also that the gold eagle of the United 
States shonld he legal tender in Canada. The eagle 
contains 2;J2.2 grains of pnre gold. Silver coins were 
made a legal tender nj) to SIO, and co])per coins up to 
2.} cents. Thus liritish sovereigns, American eagles, and 
Dominion government notes formed at first tlie only full 
legal-tender mone> . Bnt in 1!)12 Canadian $.5 and 
•^10 gold pieces were added; the act of 1871 stipulating 
that Canada shonld have a gold coinage of her own 
when desired. The Canadian SK) piece is of the same 
weight and fineness as the iVmerican eagle. It was not 
until i;)()8 that a hranch of the ]{oyal Mint was estah- 
lished at Ottawa, where Canadian copper, silver and 
gold coins are now nn'nted. 

There ne\er has JR-en any silver (jnestion in Canada. 
The act of 1871 estahlished an niuiuestioned gold stand- 
ard. As the Canadian hanks have furnished the country 
with a safe and elastic medium of exdiange there has 
hirn suflicient currency to meet the needs of the people. 
A good deal of jealousy, however, has heen shown to- 
ward the jx.wcr of the chartered hanks to furnish a paj)er 
medium of exchange to the people. Many have in- 
sisted that the issuing of paper money sjiould Ix.- the 
govenitiienrs sole prerogativ<'. Tliis prolilem, iiowever, 
^vill he dealt with in Chajjter XXXII. 



XATL'HK Ol' (in: I) IT 

•220. Griffin and Linds of crcdils. — A ci-edit is a de- 
Icrrcd or jXJstpoiR'd jjayiiRrit of rii<iiKV. It always 
itj)reseiits a pi-oniise, ex|)irss or implied, to pay a certain 
imniber of dollars at some time, definite oi- iiidetinite. 
IiiasniiK'h as it is a promise to j)ay money, certain 
forms of it circulate in lieu of money, the ease and 
extent of this cii-culation de])endin<>' dii-ectly upon the 
intc^-rity and ability to pay (>f the maker of the credit, 
and the date and conditions of ])aynient. 

Credits come into existence always as the result of an 
I'xchange, either the exchanne of credit for ^yoods, 
v'iedit for money, or ux'dit for ci'edit. I f A pui-chases 
ydods from li, ho Tuay tendi'r in payment either ^'old, 
liis j)ersonal check, l)atik notes. I'nited States notes oi- 
his own ])ronn'se to pay in sixty days. If the payment 
is made in yold. no credit operation is imohcd. If 
iiii'de by check or in l)ank notes, it repi'csents merelv a 
ti'anslei' ' .'' credit already eicated by the bank. If 
made m I'nited Statts 'otes it is likewise a tia.nsfer of 
cicdit, this time of (io\ trnnienl credit. If ])a\-ment is 
made by his own promissorv note. howfM-ri\ ■( new ci'edit, 
pa}'able at a <lefinite time, is created. 

Credit is of two kinds noii-cireiilatino' and circulat- 
ing'. r\on-circuialin^' credit accompiishes one ex- 
chano'e while circulatino- ere'dit accom])lishes man\ . In 


.mum:v AM) i;a\kin(; 

tlic case a'Dove iT A pays witli a promissory note, ;iM 
c'Xfhan^'c has been made l)y nieaiis of the credit tluis 
cieatcd. Al tlie end of sixty days, however, the crecht 
must he H<|ui(hited. hy means of cash, if it has not Ihti; 
• •iincelled hy an e\chan,m' of properly in the opposite 
direction. The cre(ht which serxed as a me(hiim of e\- 
ehany'( in the ih-st transaction must itself he ixchanired 
for cash at matui-ity. and the whole transaction amounts 
in the end to an exchange of n-oods for cash exten(hn'>- 
over a period of sixty (hiys. 

2.'J(). f'.sc (if crcdil in indiislr//. -l^udvr our capital- 
istic systini of imhistiy e\ei-y enterprise i-ecpn'res cap- 
ital The cutnprcuciir must ha\e hnil(hn<^s. land, ma- 
chinery — a ^reat variety of capital <^-oo(l.s which make 
up the plant and e(iuipment of the linsincss — and he 
must ha\e the ser\ices of employes and raw matei'ials. 
Jle must prej)are for the \ai'ious expenses of the busi- 
ness — wanes, taxes, etc. If he is not a capitalist him- 
self and cannot induce ca})italists to share with him the 
risks and profits of his business, he must borrow this 
property t'roTU otiiers, i\il these ()b]i<>-ations arc credits 
and must sometime he li<iuidated by the payment of 

The form whicli these credits will take will be deter- 
mined lar^rcly by the nature of the business, the sa<racity 
of the fiiircprciinir himself and the condition of the 
credit market. We have seen that credits vary in re- 
sjH'ct to time and conditions of ])aymcnt. Most nilrc- 
pnnciirs arc capitalists to a certain extent, their demand 
for credit arising' from the \'i[v\ that thev expect to 
cnlarfT'e their business by their ca))ital. 
Let us suj)posc that a manufacturer owns outritjht his 
la?i(ls. factory and machinery, and in addition has a 
v.orkin<r capital sufTicicnt to meet his payrolls and ex- 


N.MTUi; ()!• ( KI.DIT 


HI uses lor some liiiii' to coiir'. lie lias also a slock of 
liiiisliKi ])i-o(lucl on hand, tiic market for which is sca- 
-niial and which anioutits to only one-half the jjroduct 
v\liich he e.\|)i'cts to market, or jxi-liaps has contracted 
to deliver when the season comes. ()h\ ionsly he must 
li;i\c more raw material, and if he cannot jjnrchasc it on 
eiedit. he will i-o to his hanker, make a complete state- 
ment of his condition, and if it is satisfactory, <rive to 
the bank his {)romissory note maturin^r at a date when 
he will have marketed his prodnct. In return for this 
he will receive a credit on the hank's hooks, which will 
enal)lc him to purchase the desired material. 

•2:i\. Function of comincrcial baiih'ing.—Th\s is the 
^ireat function of commercial hankin<r, to enable manu- 
facturers and merchants to enlar^re their Jnisiness bv 
e\tendin<r to them for short periods the use of credit 
h\ which they can carry ooods from the time of pur- 
• liase to that of sale. The readiness with which credit 
will be o-ranted depends upon the reputation of the 
iiKHiufacturer or merchant for sellin^r his product, the 
■iniount ol' credit asked for and upon the nature of the 
Inisiness. In dull times not every commodity will sell. 
}et upon the proceeds of the sale depends the redemp- 
tion of the credit. Therefore those who deal in articles 
^y\m^h are always reasonably sure to sell, such as food 
products, clothing- and in oeneral the necessities of life, 
ne the most certain to obtain credit and in the larf^est 
I mounts relative to their ca})ital investment. Heputa- 
llon for sellin,ir. however, is a on-at factr)r, and credit 
1^ often extended on this account even to those whose 

product is. (Tcnerallv speakiny-. not apt to be quicklv 
,,.,,, f:i,i,,. ' • ^ • 

It may be. however, that the entrcjucncnr after reach- 



ui<T the limit of his own resnurces. 

will i^refer to add 


\l()\l,^ AM) HAM\i\(. 

pL'i'iiiaiKiitly lo his \' orkiii;^' capital instead of iiuTcasiiijr 
and dccrcasiii;^- it as liis Imsiiifss dfinatids. It i lay lie 
that tlu' nature of liis l)nsinrss is sufli that he linds it 
(litHcult to ol)lain ci'i'tht in (hill tiuics. Kxtii in pros- 
l)crons limes he may feel that a yiMieral contraction of 
credits is due. and that he may lie unahle to market his 
product to meet his ohli<^'ations. If such is the case, he 
may add to his woi-kinn' ea|)ital hy hori'ow in<^' for a ion^^ 
peiiixl. placiny' a mort<4au'c upon his i-eal property. 

23'2. Mort 1^(1 ill's (111(1 bonds. -^ A mortu'a^'c is a secured 
credit, that is, seeuivd hy the |)led^e of specific pro|)- 
ertv. The most common foi'in in which this kind of 
credit is used, is that of l)onds. A liond is a portion or 
fiaction of a mort^an'c. When mort^'a<4"es are so lar^e 
in amount that in theii- entirety they cannot find a mar- 
ket with any one indi\idual or institution, they • 
di\ ided into parts, called honds. for distrihution. T; 
credit must he redeemed, of course, at its maturity ,nist 
like the shoi't-time civdit, hut the matui'ity is usually far 
enou^di distant to ^'ive ':\'r u'rcjiri'rnr an opportunity 
of mcctin<Ji' it out of his accumidated ])rotits. Moreover 
if the pr(<perty which secures it has not dei)i'eciated in 
the meantime, it can often he renewed at matui'ity. 

This foi'ni of ci-edit is ordinai'ily used when the pro- 
ceeds of the loan are to he used for some fixed or per- 
manent investment. Tims it is the form commonly used 
hy railroads, puhlic service corjjorations, lar<4"e industrial 
corporations ownintj' xaluahle real ])ro|)ei'ty. and the 
like. The interest on the honds is paid out of the sav- 
inns of ijie coi'poraiion. and when ihey mature the 
pi'ineipal is paid hy the sale of new secui'ities, 

I'.V.i. Erdmnic of'iimhcr huhtsirii. There are cer- 
tain industi'ies. howevei'. in which hoth these methods of 
obtaining credit are used. A good example is the luni- 

NA'I TKi: ()|^ Cin.DIT 


I"!- liidiistiy. we havr seen that llic nurclianl and 
iiiaiiiit'aiiiii-i'v of iiuickly coiixrrt ihic pi-odiicts will ordi- 
iKiiily horrow coiniiKTcially and lliat railroads and sim- 
ilar c'oi-por; ;ions will 1)oito\v on lono-tinK' ol)ii<>alions 
I. cause tlic inorR-y so obtained is to Ik- usid in iHTiiianfiit 
in\('stinciil. and the ohliyations cannot he redeemed e.\- 
(v|)t hy reriindinu'. TIk. himherman is ol' eourse a 
iiianuraetui-er hut his proihu-t is not always ([liiekiv eon- 
'.'■rtihle. W'Ik n a ])anie eomes. i)eoi)le must still have 
I'ood and elothinn- hut they ean ^et alony without huild- 
in^' new jiouses. 'rherel'ore lumber is one of the first 
commodities to feel the dei)rcssion throu<>li u fallinir 
• AV in demand. 

A complete linnhcrinn' industry will own a saw mill, 
a supi)ly of timber sutlicient to last for a number of 
years, and a (|uantity of manufactured lumbei- piled in 
'he yards awaitino' sale. In tiiis country lumberineii 
e always been lar<^e borrowers. 'I'he price of lum- 
" r. and the Aalue of timber land ha\e adxanced steadilv 
\\itli the decrease of tile availal)le supply. Luml)ermen 
iia\e been quick to t;;!:-' 'dvanta^^e of this condition, and 
have always been ea<i'er to borrow to add to their timber 
holdings. \\'lien the noi-thern lumbermen beaan to <jo 
south in tlie eiu'hties they fourid that timber land was 
ejieap and that it couhl ])e bouyiit on credit, hence they 
invested theii- capital in ecpiities. That is. they made a 
first payment in cash, a.^reeinn' to i)ay an additional 
amount eveiy year or as the timber was cut. Obvi- 
ously they must manufacture and mai'ket lumber in 
order to meet theii- objin-ations. As soon as the ])roduct 
'.\as ready for sale it was a '■bankai)le asset" because in 
boom times lumber finds a readv n kct, t'oiise- 
(juently lumbermen became hir^'c commercial borrow- 
ers, the amount of tlieir short-time credit outstandiny-- 



MOM.V \\l) |{A\KI\(; 

often fxccediiio' the valiu' of the inaiiu factiind stock 
oil hand. 

'2liL Adidtiidiu^cs of ti)nl)cr bondfi. — Sintr the yeai' 
r.tOO. lio\ve\tr, many dealers in hunher have taken ad 
vauta<^e of the inerease in \aiue of thtir tiniher hinds to 
retire their outstandinn' notes and the ohh->'ations thev 
iiuMirred in the original purehase of this laiuK hy issiiinu' 
bonds seemed hy all their real property. These bonds 
are nsiiailv sei'ial. a eei'tain amount of them matin'ini)' 
e\ery year as the timber is cut. The ad\ anta^^v of this 
method of borrowing is obvious. '. /nl\- a fraerion ol' 
their indebtedness nuist be met each yeai'. and thev know 
lu-fori'hand just what tliat amount will be and can pre- 
paid' for it. When thi'y borrow on short-time notes 
and a panic occurs, they may tind it veiy ditlicult either 
to sell theii- product or to renew their not* Almost 
tbeii- entii-e indebtednvss is likely to Ix-omc due within 
six months, and if conditions do (.,• ..nproxc. there i> 
Urave daniici- of l)ankruj)ley. It is jjrobable that this 
condition was lar<4ely responsible for the bi^' slump in 
the price of .Southern pine followini^' the panic of 1<M»T. 
'I'liere was such a yreal amount of" s]u .-t liine lumber 
credits outstandinu'. that tl.^ competition between sellers 
became acute and |(rices declined vcrv sharply. The 
IuuiIh inien wliost liHalions were in tin form of bonds, 
howcvci-, did !i.)t enter this (■ompciit ion. so did not sacri- 
fice either their manufactured product o|- their timber. 

2.'J."). rali.s nn /^o//f/.v,— The form which this 
borrowing' will t;,k<', however, is further inlhienctd b\ 
the condition of the cndit market, as evidenced bv the 
prevailin;^ ratt of inttusi. The rate of interest paid 
upon the various kind 'oMM-time obliuations is f.iirly 

wiii Tixe.i, .tiiiiwni;/! li t ■ sotii w iia i wiiii the d<nian(i 

or supply of such iin i- 'I'lms railroad bonds 

\ A'I'I'Ki: Oi' ( HKDir 


Uvdv i'roiu .*{' o j)(.T cent to !•' ■_• \Kr triit interest: public 
service corporation Konds tVoni •!•'•_. per cent to .')'.. per 
cent and industrial and I'eal estate niort<4a^e bonds from 
.") per ce!it to <! p"r cent. 'I'liese rates are fixed by tbe 
1(54 a id in which the bonds are held by investors in in- 
spect to security of |)rincipal and convertibility into cash. 
The rate at which the commercial borrowei- must dis- 
count his note, howevei. varies witlun much ,ureater 
limits. It may i)e as low as ,'i per cent when the demand 
t'oi' credit is small and the banks are ea<»er to loan. 
'I'his condition is known as '"easy money." When l)usi- 
ness imi)ro\ts and demand foi' credit inci'easrs, the rate 
advances until in time of panic it may be as high as 10 
or 12 |)er ctnt. The axera^c is IVom i t') 5 j)er cent. 

•J.'J<>. L()ii;i-ti>nc horro'iciii;:-. — Naturally the < ntrc- 
prcncur wishes to l)orrow monev at the lowest possible 
rate. Dui-iui^- periods of easy money he is loath to re- 
tire his short-lime iudcbtediicss on which he mav be 
payin<4' 1 per cent i)y the issue of i)onds which will cost 
iiim r> ])(■)• cent. .\s money hecomcs ti<4iit. howexei", he 
lucomes anxious to make this change, but often the time 
lias ])assed when the maiket will absorb his bonds. 
Thus, in an endeaxor to obtain the lowi'st rate at all 
liiiu's. thci'c is danger of his finding himself in a tii^ht 
money juarket \y\\\\ all his obligations in short-t imk.' 
lorni. 'I'he .idxaiitanc of |oni»'-timc borrow in j"' in ci'r- 
lain lines of indiislrv is so ob\ ions, howcxci'. thai sai_jaci- 
Miis business nun will often sell high-rab' bonds wbiii 
the commercial ijh is much lowci'. knowing that in the 
!'>ng nu! their interest account \\\\\ .iM'ragc lo'> er, .and 
that in case of panii" Iheii- situation will be much more 

'I'M. ('r<(/il I (■(iiioiiii.i s lilt iisf o/ i;o/</.— Credit is 
like fire — u good ser\ant. but a bad master. So long 


y '< 


MitM'.V \\l) 15 \\!<I\(; 

as it is coiiti'ftrud aini |)rc\ cntcd \yi.\\\ siiddrii contracl- 
tiiin it s(i\cs to icoiKiiiii/c the dm- oI' yold. doiiiu tli, 
work of excliaiiii'iiig ^oods nion riUix eiiiciitly lliaii <4()l(i 
itsc'li". \\\ lia\e stvn tliat ])ii('rs drpcnd iij)oii tlu 
aiiiomit of the media ol' cxcliaii^ui'. 'I'lu iist' of credit, 
tlu'ir'' 'ic. peniiits Inisiiiess to expand and trading' to lit 
aecelei'ated witlioiit a rednetion of pi'ices. l)nt on tin 
otii( r hand iU nse destroys the eheek which otherw isi 
\\()nld ])ri\eni ])iiees from i-isin^' to an artitieial lieinht 
tlnis hiin;4inu- on a panic. A discussion of the etfect 
of credit on piic<>, ho\ve\ti-. h( lon,ys to a later eha|)ter. 

•J.'iS. Lii/iii(l/ili(,ii of cr('<lil. We haxc seen that all 
])ri\ate ei'i'dits must in the end he jitpiidated hy means 
of casli. Dnrinu' a lime of prospi rity wlu'n prices arc 
lisinu' and I'oitnnes are htiny' made simply hy hnyiny 
at :. low pi'ice and sclliny- at a higher, many people pur- 
chase property <tn ercdit. usually i>i\ in,u the pioperty 
as seoui'ity fo!' tJK credit. The pi-olits of industry are 
inert iuL;'. Ik nc( husiness men are stiainin;i' e^crx 
ner\'e to increase their husiness, 'I'o (U) this tin \- must 
oiitain cr<-dil. l-'inllnrmoi'e at such times hankers he- 
come accustomed to seeing" yoods sold and credits 
litjuidated. and they lo;in moi-e fi'cily, 'I'Ik ir portfolios 
•AW full of lime credits, matnrinii in the future, aetpiired 
in exchanye for (Uiiiand ciichts (hie whenever called 

At such a lime snpp(»se a political or linaneial dis- 
turh.nice sh.ikcs puhlic conlidence in the ahility ot 
dihlors- especially l>anl<s — to meet their ohliyations; a 
demand for the payment of such crcihts as ai'c (hie is .s\ire 
lo f illow. Since the ohjiyations of ;i hank arc always 
du( and payahle. they ai'c apt losun'cra run." When 
Ihis occurs tiicy must liiemselvcs re(|ucst paynn nl of nil 
cicdits thai air (luc them and make praelieally no k 


NA'iTiii' oi ( i{i:i)ri' 


iK'wals. Otlici' huiiUs follow Miit. This forces the 
iiK rcliam i. id niaiiuf'ac-tiirfi- as thrir notes hccoiiii' due to 
sell their goods at a saeriiiee, and l)el'oie we know it we 
are in the midst of a financial |)anie. 

•J.'JJ). Cow nirrcidi iKi/nr houses mid I he en (Jit .sitiin- 
tioii. — The (hinder of this condition has been soinewliat 
augmented l)y the custom of large borrowers discount- 
ing their notes through commei-cial paper houses. 
While this is more necessary on account of the proi'iss 
of consolidation which has gone on in industry in the 
last decade, it ne\ irtheless injects info the situation a 
lurther element of danger. l-'<M'merly the merchant 
lioi'i'owed fi'om his own bank direct, oi* if his business 
was large, from two or three banks in his own city. 
lie knew the bankers pei-sonally, and kept an account 
;it eai'h bank, 'i'hey were anxious to sei"\ e him. and 
woidd do so it' possil)le. e\cn in ca^' of a panic ^lence 
hi, chances cf renewing his maturing notes ai such 
times were good. 

With consolidation, however. a?id the growth of large 
industries came the necessity of .'reased credit. 
Many industries are now so laige that the l)anks ol' one 
city cannot jxtssibly finance Iheii' boi-i'owing. Hence 
the necessity ot' a noteljroker or commercial |)aper 
house, whose function is to distril)ute the notes ol' 
\aiMous eoncei'iis throughout the i)anks of the cjitire 
eoiinti'y. Xo doubt it is a necessary de\ tloj)ement of 
the era of consolidation but it destroys the jxrsonal 
I lenient ol" banking. The b.mker in Kansas has no per- 
sonal interest in the success or fallni'e of the \ew ^'ork 
nicreliant whose note he holds, beyond the payment ot 
that particular note, and in times of |)anic he is (piick 
to re(|uest \aiuai)ie payment. i he aitiiity to i»orrow at 
a large number of banks is an asset ihiring prosperous 


.M()M:V AM) H.WKlMi 


times; luil if ()\ei--r\ei('isf<l. it can ncconie aliiu •: in ;i 
niouient a most imijortimat ti)ility. 

•J40. i'sc ;if credit <is a ilium u/' iwclianffc. — Tlu' 
most important lunction ol cirdit is it^ |)o\vit to circu- 
lalf as a mcdinm of rxrlian^i-. ()hvionsl\ . if cxt-liannr 
can l)c consummated in lar^-e volume hy means of credit, 
the necessity of iiuii'e national investment in the |)reci()Ms 
metal is ohviatdl. The w lioie system rests upon thi' 
assumption not e\ei-yone is ^oinn' to |)i'csent de- 
mand credits lor redcmjjtion at the same time. Ex- 
cept in extreme instances, the assumption is a ^ood one. 
and credit has hecome tlie chief meihnm of exclianiic of 
this country. 

In oi-dei- to eircuhite in lien of money, credit must 
lie payahk' on demand, l-'urthermore. the issnei- naisl 
he one in whose intt'ority and ahihty to j;av. the puhlie 
has entire contidence. Xatin-aliy, then, the credit 
which eiicnlates the most freely is (ioxernment credit. 
Second to this is hank credit, and as this is the medium 
m which a lar<^e proportion of our exchanne is made, it 
is well t(» consider it separately. 

'JJ-I. lidiili- credit. Hank credit has two forn.s. notes 
and diposits. The true hank note is the simple {jromise 
of till' hank to pay lii^al lendei- on demand: the de- 
l)osit is prei-isely the same except in form. Thist 
credits are creattd as the i-e-nlt (^\' an exchan<.;e, either 
of money for credit, or credit for credit. If the cus- 
tomer hrin^s mtaicy to the hank he recei\es for it eilhei 
notes or a deposit acconnt, d( p( ndiny' u|)on which will 
hest suit his neids. 1 1 he comes (o the hank as a !«or- 
rowcr, he exchanyts his ouii time cicdit for the hank's 
(hniand cr dit and a.L;aiii t;ik( s it in either lorm he de- 
sires, it is liii- eredils thus created winch p( riorm so 

NAT! Hi: oi' ( lii.nrr 


-nat ;i j)i'n|)()rt ioii dI' dim iiuiiuy woik. The notes 
tii( iiisch IS passing' trdiii hand to han(L and the' clKcks 
.iiawii auainst thr deposits eonsuniniate j)rohal)l)" '.>(» 
]ii 1- cent of onr exchanges. 

'The issue of ercchts intended t'oi' eircidation l)y pi'i- 
'.;i.t< persons, corporations and hanks has ln( n attcnch'd 
so nuii'h aliuse in \hv ])ast that n'oxcrnnicnts ha\e 

me to re<^'ard it as a (piasi-puhhc i'unetion which inn>l 
he i-(.\yiilatcd sti'ieily. Accordingly in this co;intiy the 
iianks ha\(' lost the powci- to issue tiaie l)aid< notes, and 
lan onlv issue notes secui"c(l h\- a deposit of ;4o\ nnnicnt 
liMuds with the I'nitcd States 'I'reasury. Oui- l)ank 
notes theret'ore arc really ( io\ eiaiinent honds con\t rtid 
Mito cui'i'iaicy. Isach note is sini|)ly a IraiiURiit of i 
l"ind stripped of its interest and payahle on demand. 

•J+'J. Dc/xisil credit. — The other foi'in of circidalin<^" 
ii'cdit. or ci'cdil i'urrene\ . consists of cheeks and di'afts 
drawn against deposit ci'rdits. The enj-rcncy is not the 
rlicv'k or draft Imt the deposit credit itself: the ijocu- 
iiient is siniply a tcin|)()i'ai'y foiin which the deposit 
takes foi' ciiculation. 'I'lie di'awiny and payin<i' ot 
I'liccks do not expand or contiae-t the deposit curi'cncy 
luit merely measure its rat( o| (ireulalion. 

This form of credit has heen found to he much in tl( ;• 
Miifcd to the needs of thickly ^tttl^■d communities than 
lie hank note currtiic-y. wlna'cas in new rc<,ions with 
poor iiankin;^' t'acilitics, notes arc still the favorite 
iiicdimn. 'I'liis is Ixcause of the fai't that in new 
lenjoiis. transactions are smaller; whereas in the I'itjes 
transactions .in- lar^c ;u!<i it would \n uiosl hurdi'u- 
somc to car/y ahout lar^c amoinits of hank notes with 
^vhicli to settle oltliu'at ions. It is onl\' in this counti'V, 
iio\\e\er. that tiu' diposit cinrency has ieaclnd its full- 



M<t\! N' AM) HANKINci 

est <levc'l()|)iiieiit ;ii!<l it is noteworthy that cviii here it 
(lid not iRoin to do so iintd rtst rict iocs \ww ulacrd li\ 
the (ioxcriinicnt upon the issue of hank n(»tes. 

('[) to 18.>.> th( note issues oT the hanks exceeded 
their (hposits. In that year deposits lolled ahta.l 
somewhat, hut it was not until ihi- national hank act m 
1H(>.) that till \ were yiven theii- I'eal ini|)ttiis. Since 
that time the (l(po>its ha\f inci'eased out of ail ijid- 
jjortion to the iiicn a of the capital invested in Iiank- 
iii^\ while the notes have materially fallen oil' in 

'2r.i. Kldslinlji (,f (h'pasit crtdll.-- 'V\\v reason for 
this condition is to l)e found, of course, in the increase 
of |)opidation and the conse(jueut oi'outh of the hank- 
ing- hahit: l)ut even moi'c im|)ortant than these factors 
in its oi,,\\th has hecn its innate ahility to provide a 
inedium of cNchanu'c which expands and conti-acts w itli 
the hiisiness needs of the country. There are certain 
times of the year when exchanges increase n'reatlv in 
volmiR-. this condilion hein^' partienlai'K- true of siu'de 
comniuiiities where industries aic not ^reatlv varied. 

^foreover. as husiness heconu's hrisk or slack, Iheie 
aic (han.'ics in the volume fiom year to vear. This 
necessitates a constant cliaiii;-e in the amount of the 
medium of exchange. Cnhss it is a |>eriod of m'ncnd 
speculation and ertdits rest uixiii an unstahle hasis. this 
change in the demand foi' midium will he met auto- 
maticallv hy an increase oi' deciease of checks and 
drafts drawn aLtainst the dt |>osit curreiicv. W'c shall 
see lairr on that this is the only eui'iiiiev in use in this 
countrv that had this atfrihute of elasticity. It is oh- 
vioiis that the issue of hank notes which must he fi/st 
se(aired hy drpusil nl ( .ov ( rniiK nt honds with the 
'l'iiasin'\- IS exeeediiii^iv iiulastic. 


NATlKi: (JF C l{!.l/ri 


Il;i\iii.u' ('v)nK' into cxistciicf ;is the i-csult ot' an cx- 
(■lian<4C' transaction, tiicsc circulating' credits scr\c as a 
medium ol' e.\clian,y(.' in a nuniher of transactions hel'ore 
lli(\- are extinunislied. Tliey are usually li(iuidated by 
cancellation of one against the othei" tatliei- than hy pay- 
ment oC money: so that the exchantits which they ha\c 
made ha\c not merely ])ost])one(l the actual transfer of 
mone\' as in the case of the non-circulating credits, 
'i'lie fact that they ser\ c tlu' |)ni'|)ose of money and are 
Usually setilid hy ca.ncellation misleads jjcople into 
supposing that they oln iat( the need foi- money. That 
siich is not the ease tliey leai'u sometimes to their sor- 
!ii\\ wjieii th(.i'e comes a u'c'i'ci'al demand for the re(lem[)- 
tion of credits accordin;^' to their tenor. 

The vohimc of credits contracts wliene\cr there is 
liiiuidation or whenex^r the credits hecome de|)reeiatt'd 
in \alue. As loni; as the dt I tor (.'ontuHRs to meet the 
matured ohli^ation In mi»ney their \ahie is maintained 
liut wlKiuvcr he )•( fuses to do this \alue hi-wins to de- 
cline concuri'cntly with the chances oi' future |)ayment. 
A credit depre<-iated to half its par \alue has lost halt' 
its power to do money woik and is conti'acted half as 
mucji as if it had heen liiiuidated. 

Inasmuch as crtdc can serve the pui'jxises of money 
^ \ en hettei' than mone\ ilsclf, no person wiiuld ever de- 
mand mone\ unless lu thought ;t moi-e \aluaI>U' tha?i 
the credit, thai is. unless, in his opiniori. the \alue of 
'he ei'tdit had d( preeiated. Such a depreciation could 
take place oidy when contidenee in the aliility of th( 
debtor t(i pay was imj);!ii'i<l. 'I'hc only exceptions to 
tins are cases whire ^old is riiiuircil l^ir use in the arts 
iiid for forcjiifn payments. The run on the (io\- 
I'limt nt in lS'J.'{-t' for u'old foi' tlu redemption (^\' 
ureenhaeks was caused h\ IIk (hmand i'oi- liohl to he 


yU)M.\ AM) I5.\M\I.N(, 

exported in scttlciticiit of the iiih riiatioiial l)alaiK'( 
\\liicli had oonr a<4ainst us. 'I'liis le,<«itiiiial( and 
iTUidar demand fnr oold soon Kd to anotlur demand 
which ai-ose lieeause people heoa.n to fear that tlie (iov- 
eminent niiyht not he al)le to meet its ( Ijh-^ations. 

'''" maintain the \aiue of outstanding' credits it is 
necessary for the issuer to sustain the confidrnce of the 
piifihc in his ahihty to pay on demaiuL 'I'his can h( 
• lone only hy kifpino- within easv reach, monev enoui-h 
to satisfy all hut the most extraordinary demands. It 
IS not enou<>h that he have i)roi)erty which is onhnarily 
eoinei'tihle into means of payment, for when the (U- 
mand for licjuidation comes it is likely to fall on e\cry- 
one at once and no one will care to |)art with money. 
Safely foi- the issuer of demand creihts, therefore, lies 
oidy in kei'pin..- ;,t all times a reserve of money sulli- 
cient to maintain confidence in his ahilily to pay. Tiiis 
reser\ e is the hasis of outstanding- credits. 

•Jit. (;(,lil iJic for (ill credit. The hasis for 
hank credit is resei'\c money. All of this reser\ e 
nKMuy exeejjt ^old coin is hased more or less on the 
credit of the government. It is kept at par with <><)ld 
lieeause the ,«io\ ci'nmiiit stands ready to i-edeem it dol- 
liii- foi- dollar upon (kniand. In ordei' to meet |)ossil)le 
demands for rede?iii)lio!i thi' o(,\ (rnnieiit is reiiuired to 
k(rp a <iold reser\e of S1.)().()()().(M)0. The i)rincipie 
hehind this law is the same as that hehind the reserve 
section of the National Hank Act. TIk' cn<iit monev 
of the u.ncrnment is hased uj'on oojd. '['he hank 
'•'•'■'!i< "!' the coimtry is hased upon government credit 
money, plus n-o|,j. 'rj„> ordin;!iy time and nxrcntile 
'■'■•■''i' "'' •'"■ n.-itioii is hased upon hank o-ovf rn- 

tu. lit credit, money and ^(,1,1. The f 
iihivti-ates the idea: 

ollowiim (liayraMi 


NAiTKr, oi- ( i*i,i)ri 


M(i( .■mtilc ;in(l 'liiiit' Cr-iiit. 

,, , ,. , , ( Hunk Votes. 

1 Deposit Currency. 

('■(ivirmiirnt ("rcdit Money. 



•Ji.j. lifscn'r. — The t'ssciitial Icatiirc of the hank is 
its powtT to Ucx'[) oiitstaiuhn^' a mass of non-interest 
liiafin^' demand erethts. either in the form of notes or 
deposits, whieh it has issned in e.\elian<;'e t'or interest 
liearin^- tinu' ei'echts. To keep these demand erechts 
Milt, the hank must lia\e the eonfidenee of the pnhlie. 
This it aetjuires hy its capital and reser\ e. 'Vhv re- 
M i\c re))ri'sents to the depositor his ])roteetion, shoidd 
in' choose *o re(iuest imme(hate reck'mption of his cre(ht; 
the ca])ital and surphis, represents his idtimate pro- 

The national hatd< act re(|uires that national hanks 
111 central reser\ e cities ( Xew ^'ork. Chicago and St. 
Louis) shall keej) a c.ish reser\-e of "J.") per cent of theii- 
oi landin<^' demand credits. This rcser\e consists of 
Hold, and (io\ernment ci'cdit. 'I'he <>eneral rese)'\e 
cities, of V. Inch there are forty-nine, must keep 2.5 per 
cent reser\e with the privile<>'e of de])ositin<4- jialf of it 
n centi'al reser\ e cities. All other national hanks must 
ivci'P a 1.") |)cr cent resi'r\(' with the j)rivileg'e of (lej)osit- 
in^ .'J-.') of it in reserxc city hanks. 

'2U\. Kfj'cct of rcsiTi-(' r('(/iiir('in('>i(s. ~'V\\c amount 
of reserve which shoidd he kept hy a hank dei)erids npon 

1 1., 

. 4- I' :»- i i 

III. I V |V.i(ll. 

I 1 • !!..., 
1 i i i i V \ 

:ire due to other hanks they are more likely to he called 
t'oi- than if till \ -AVI' ill th( h.-nids itt' lar<>e nnnil)ers of 




people seattered over tlie country. The aniomit of re- 
serxe nceessavy eaiiiiot he (letennined \)\ any fixed rule. 
'I'lie purpose of t'le reserve reiiuireiueiits ol" the national 
hank act is to put a cheek on undue e\[)ansi()n of de- 
mand credit hy the ha.nks, and forhids tiiein niakiny 
further loans as lon^r as tlieii- reser\e is helow tlie le^al 
rciiuirenients. hi |)rospei'ous times this operates verv 
well, hut times of ciisis and strin<jfencv are prolcn^a'd 
hy it. 

At such times each hank strives to hold as lar^e a 
reserve as possihlc. refusin^ti- t<> make new loans or to 
renew old ones, and withdrawing- its deposits from the 
city hanks. The effect of this is to inte: ''y the 
strin^'cney. The proper i)olicy would he to loan freely 
so that solvent firms may not he compelled to suspend 
heeause they cannot <yct ready funds with which to meet 
iheir current ohli<T-ations. The Hank of Knoland pur- 
sues this policy and i)ermits its reserves to fall to a very 
low point, hut it selects automatically the most uroent 
cases for relief hy raising the rate of discount. In the 
panic of 1907. the Secretary of the Treasury and J. V. 
Mor<ian followed the correct hankinjj;- principle when 
they put on the market large sums of money to he 

24.7. Ddi^cr of NSC of credit in panics.— It is during 
panics that an elastic medium of exchange is most 
needed, and unfortunately the (ie})osit currency, ordin- 
arily elastic, not only refuses to stretcli at such limes, 
hut contracts instead. Just as soon as there is a gen- 
eral demand for rcflcmptioti of private credits even th( 
hanks are compelled to redeem their cred.ts in legal 
tender, whether their ahility to j)ay is thought to l)e 
impaired or not. Fo do tins they must pay out their 
reserve money. This in turn cripples then ahility to 

AAll lii: Hi ( Kl.Dll" 


i"'ii and f'uithcr (Icplili s llif deposit ciiririK'y. 

Most of the so-r;dlL(I niiii iicy i)ills wliicli have hrcii in- 
troduced in C'odoi'tss lia\c att(!ni)te(l to rcinrdv the 
i\il liy aiiihoi-izinu- hanks to issue note credits in na\- 
III' lit of the dej)osit ere(hts. In this way note e lits 
■onid he used insl( ad of iTservc money for eircuhition, 
,■111(1 unless the ei((ht of the haiih has Hiireir-d. reserve 
:roiiey will i-ol he (h'awn out. I 'ndei- our incsent law 
Mk issue </f notes is inii)raetieahie at such times bc- 
iiiise it neetssilaiv-- tin purchase of ( 'nited States 
!"tiids, whieji woid<l findher (le|jletc the amount of the 

In spite of these fjirave dan^-ers wliieli attend the use 
"l' ere(ht as a medium of exeliaiio-e, its use is a necessity 
"f the era (»f modern industry: and as the puhlie is 
gradually aionsed to a study of tlu' pi'olilrms. its de- 
'rets Avill disappear in the wake of eompelenl. Icis- ion. 

■J 1-8. IiiipoiidNCC of en7/;/.--C'redit is the life !)1()0(1 

: the economie system, its amount and condition de- 
'' rminin^- whetln'r hnsiness he healthy and vigorous, or 
iiiihealliiy and sta.niiant. It determines whethei- the 
[(opulation shall he hnsy and prosjjcrous or unemployed 
and poverty stricken. Insomuch then as the science of 
hankin,^- ;uid money is so intimately concerned with the 
\ery fundamentals of iifc^-tlic procin-ement of food, 
shelter and clothinn-, with h.ealth and witii the whole 
-iandard of li\inu'. it assumes an importance cvjual to 
my other. If all the distress which followed the panic 
of 15)07 — the la.ilurc ol business men. the i-iduction of 
incomes amon;^' all classes, the loss of employment and 

\\;|<rCS hv thoUS.Mluls of WMl-L- in, ii In-ii . , i!>i , .- i ■..>,■....), ■ :..!,. 

^ '.-^ i ■ ■. 

iiinumerahle homes if all this tiemendous calamity 

was nniicccssai-y and remedialilc. then the subject is one 

\ II II ' 




M()M:V ,\Ni) iS.\NKi.N(. 

oi' tiic greatest Imiium interest, well worthy of the at- 
tention ol' trained investigators and master minds. 

We have progressed I'ar enon^h in onr stndy to 
reahze that the sole eanse of some of onr panies is the 
misnse of the eredit niedinm and that it is a leadini,' 
faetor in all of tjiem. Abnormal and sndden eontrae- 
tions and e\j)ansions of eredit disturb the eeonomie 
e(iuilibriiim by eausin^ iluetnations of priees, manipu- 
lating' profits, and (ksti'oyiiiH' the sj)irit of enterprise 
among those who eontrol the industrial aetixity of tiie 


i' ^•' 



•J 10. ///r;vY/.s7 //.;'■ need of more efjie'ieiit inotiei/. — We 
ii;i\u already scrii that the use ol' crccht afreets the gen- 
ial level of j)riees by iiKTeasini,^ the etfieieiiey of money. 
Were it not I'or eredit tiie price level unist always he 
lixed by the rates hetween the amount of goods to be 
( \ilianged and the amount of money in eireulatioii. ])ro- 
\iikd of course that the rate ol' circulation remain con- 
>^tant. As ])0])ulation increases, more goods are 
produced and more exchanging must be done, hence 
prices are certain to decline unless the supply of money 
is increased or rendered niore efticient. Declining i)ric(,'s 
Ksscn profits, the inccntixi' to iMiterjJrisc is deadened. 
ilie factors of ])ro(iuction become idle and depression is 
rlironic. A develo])ing counti'y. therefore, to be healthy 
I (oiiomically must ha\ c a constantly increasing quantity 
• I the medium of exchange. 

This need has been met by credit, chiefly in the form 
n\' bank credit. In the preceding chaj)ters the several 
kinds of credit have been discussed and it may be well 
til consider briefly the eff'ects of each. 

-.)0. Effeet of unn-eireiddting credit. — The use of 
Hiii-c'ii'culating credit (promissory notes) has very little 
H'ect on ])rices through any economy of the use of 
Hioney \\\m-\\ it brings about per sc. Such credits must 
be settled at maturity in money. Hence the use of 
;in.iicy ]S p05i()0iicu iatiiui iiiiiii win uiled. il musi he 
i'emembered. however, that the use of non-circulating 



MiiMV AM) H. .\KI.\(, 



credit, while it raeilitnti s prodiu'linn and llius increases 
tlie aniniiiit of transactions, at the same lime ureiitly in- 
creases th" mcchnm l)y its i-reation of circulating^' ci'edit. 
The manner in which non-circnlatiny' cr'cdits ni'c con- 
\(i'te(l hy the hanks into cii'cnlat ini^' ci'cdits ha> ali'cadv 
heen (lescnhed. Hnsiness men issue promissory notes, 
(liscomit them at tiu' hank and recii\"e in exchan^'c I):miI< 
ci'edit (.'it'ici' in ilie I'oriii ot' nott»s or de])osil accounts. 

It is this (Kpi.isit cun-eiicy which has in tliis counti'v 
remo\ ed a ^|•^•al^•l• nait of tlu' hui'den of e.\( lianijinu' 
^oods fi'oiii 111' sjini.'di I's of aioney itself. I'fohahlv 
7.') per cent of oni' excliaiims are ])erfoi'med hy the use 
of cheeks and di'afts di'awn against these deposits. 
Mo'ny must In h<l(l hy the hanl.s aL;ainst tlu ir crediN 
as a rcscr\e to maintain conlidenec in their ridemptioii. 
hut the amount neeikd is onle iVoni l.> to '_'.") per vci\[ ol 
tlie oil I si and mil; en dits. 'riiesc checks and dia fts. w hilr 
they are merely pmmises to pay mou' y and theoretic- 
ally must he r'di ( iiied in mone\ ai'' so cancelled one 
ai^aiiisl the other thai iitlle actual money is used. 

2.")1. ('(nicilldlicn (>f ciidil. l-'or c\;imple, ht us 
take an is ihited coniiiiiinity in which there art' twc 
hanks, tlu deposits of each heiiio' Slno.OOO. ;iiid thi 
nioiuy I'csci'xcs S-J .").()';(». A. 15 and t' are local hiisiiiess 
men: .\ and 15 !i;i\e deposit accounts with one hank ;ui(l 
(' with tlu nlher. If A ni\cs his check to \\ in pa\ 
iiKUl for ;4'oo(ls, the check will !»e d. posilid h-, \\ ;ii;'i 

his accoimt will he crcditiil with the ,11 iiit of the 

I'lieck. whili's As airount \\ill hi chari^i'd. Thus i^'oods 
have I'cei! c.\chan,ue(l solely Iw credit. If .\ ^ives his 
t'lieck t(i (', it will he dt posited in ("s hank, ;ind thcorcHc- 
ally ("s hank m.iy expect A's hank to |i'i\ Ilie check in 
iiHiiiey. il IS proii.ihic, ji(iw(\er. that i ;icli l»ank will 


hecks di a w II on i h' nlher. in \ 


I i'\(iif ()nl\' 

El'l IXT oi" cm DIi ON I'lxK !"S 


;ii (liU'cR'nce ill total anKtiints. or baLincc, will l)c set- 
;i;il ill money, in this mainiri- tlu' clircks arc cantvUfd 
■mr- a^y'aiiist the other without aii} use ol' money. It is 
m')\ ions that In lari>'e eommunities. whi.iv ii is eiistoii!ar\- 
':■ ii.akc s( tt l(.-iu( Ills hy cl'i ■: !<. tliis caii-'cl iat ioii hccoines 

I ,'y i!ii]).)ffatit . IIow \( i'\ ii!i])0!'tan! t!; - eiisinm lias 
lieconie \\i!l he sf.n when Ihi liin;'l;ons of the ehai'im^' 
hdii^e iwv discussed. 

•J.5*J. II(>ic Icx-scncd (Icindiid far itioudi causes rise hi 

i/vVc.v.- Thus moiuy is nsed hy the hanks only as a 
:t sirve a<4'ainst actual ',\ithdra\\ a!s ol" luoniv and I'oi' the 
vcttlemeiil of l)alanccs. Tiie ellicieney of the dollar is 
Ny this system mnlti])lied several times, hence the de- 

. ;id for money is lessened, and prices l(, nd to rise. 
The introduction of ( Nirni of cicdit must alwavs 
' i' an im|>oi! uit inline net' u|)on |)ric( s. \\\ ])oorl\- 
Mid communities \\liei-e iiafikin^ 'acihties are mcayre 
tile nierchanl and the farmer must keep on iiand in 
their cash drawers m- pocki ts sullicient mouc \' to ae- 
eomphsh tiicii' i)urcli;:s' ^. il is in"ou\ ( iiieht to make 
|t:'yM;ents hy clicck: in fact, if th(\ did so. the cheek 
would prnfai"!', lie ro||ow((l h\- llie del!\er\ of jielua! 
!'ioney. 'I'liere is uo way lu which (hev'k-> can he can- 
celled against eaeli otlur. With the eslaltlishinent 
"\ l)anks and the i^rowth of lh( ellecl^in'4■ hahil. Iiow- 
tver. the necessity lor earr^inij- ahout larirc amoimts of 
actual money is o\('rcome. 'I'lie demand foi- moiwv is 
tliercoy lessened, am. prices ayain tend to rise. 

2.").'?. Klf'cvt (if ii'ilioiKil haul,' notes. — In the chapter 
"W the nature of credit th( dill'i leuct hetwicn tht true 
hank note and the naiinual hank was descrih(il. 
Iiiasmncli as the national hank notts ai'e secured hy 

i iCtYv iijiiii ill i . iiiis, "\\iiiCri tirc llH m i' jiiUl; iui'' (lOV- 

■ riimcnt eicdits. tlu\- ciieulat( freely as nnau \ dsell' 





- * 

J2l-i'; AM) H.\\KiN(; 

TIrIi- cfi'cct on prices, therefore, corresj)()iHls to tlic 
efiVi't of otlier I'oi-ms of (ioveniment e'-edit. and will 
be discussed under !liat lieadinu'. 

•i.54. Jidiil.' nates and chcchs dilfcri n'iaUd. — It hds 
been ah'eady staled that the (nffereru-f l)et\V(en the de- 
j)osit and the true bank note is one of ,'nrin. It remains, 
however, to describe the (HftVrenee in t'niiii before the 
effect of true baiik notes 'ipon prices can I)e considered. 
The chief (htfereiice is that the baidv note is payable to 
bearer, whereas checks and (b-afts— the foi-nis in which 
tlie dei)osit currency circulates— are usually di'awn in 
favor ol" a dt'tinite pa>ce. Bet'oiv the check is valuable 
it Miust be endorsed by the jjayce, whereas the note cir- 
culates V. ithout endorsenient. I'urtlicrniore the value of 
a check de|Hnds U|)on the si/( of the dej)osit account 
l)ossessed by the maker oT the check. Thus checks do 
not ci"culate as freely as notes l)ecause both ()ersonal 
and bank cicdit .are inxohed. 'I'liey usualiv rctui'ii tn 
the bank i)romptly for ndemption. whereas notes may 
i'liiain Mitstandin^' for considerable periods. 

Because notes arc nuant t'or wider circulation t! an 
checks, they have Ik en licnerally iiido\»e(| with ci'rtain 
preferences o\er deposits that eiialile tiiem to meet more 
readily the demand for hand to hand nionev. 'i'lusi 
banks I ay be eomiH IKd to keep a l.aru'er and speeilic 
rescr\e for !h(ir i( demplion. or |)erliaps a unaranle- 
fund with the (iovernmenl : or ;is in this country tin 
notes may l)e a first li<'n on all the .assets (d' the bank and 
be .secured by tli( pledge of (.oxcrnmeid bonds. 'I'hat 
there is danger in endowing- \\u \\- securitv with too m- 
Hexible provisions. S(> that once issued they become a 
part of the actual money supply and ju'c never j)i-c- 
senit'd ior redt nipt ion. \\ \\\ Ik se( n when our own bcini> 
noti' syst( in is deei iIm d m a subscijiient ejiapt 



The true hank note, that is. one whieh is not secuicd. 
hy the pled^ic of spccidc assets or a deposit of honds hut 
\<y die (general cre(ht ol' the hani<, may have a very im- 
port ant eft'eet on priees. Vnv exani])le let us suppose 
that the holdir of deposit erechts needs money for hand 
1(1 hand transactions. Pt-'haps he is ^'oing away where 
]iv is not known and wliere his elieek wouhl not he hon- 
iicvl. II' note issue were <4'reatly restrietech the hank 
piiist lionor liis er"(ht hy the ])ayment ol' actual reserve 
iiiDney. Fnder a system of free note issue on the other 
hand, no money would i)L' needed; the haid< would issue 
tlie noie which would he ucnti-ally acet j)tai)K' and would 
itniain outstanding' oidy as iono' as thei'c was demand 
I'lii- it as a medium of exchange. Once in the possession 
n{' another hank it would he picscntcd foi- redemption 
li(.cause money is u'ore valuahlc to ;! hank than errdit. 

The use of the hank note tends to raise prices hy 
' ss(n!n<4' the demand for money. Its chief henetit. 
however, aiises i'rom the fact that it so often j)revents 
prices from falling sharply wlun any extraordinary de- 
iiiand for hand to h.uid monev (such as wv are aj)t to 
lia\e at eei'taiii timis of the year and arc sure to ha\'e in 
panics) causes a depletion of i)ank rest r\ es and a coii- 
t paction of ei'cdit. 

'2')'i. Klf'cct of <^(i:-fnnncnf credit wouvji. — The use 
'I' (iovernmeiit eiedit money and. in the counliy. of 
iiiitioiial hank notes, has praelicMJly the same effect on 
priees as a similar inc-rease of actual money. When 
taith in the redemption is entire, and when it is uiade 
M i4'al tender .tnd is tjiert lore a\ailal)li for hank reserves. 
m ificrease in (Joverrmieiit credit mon«y ten'ls to raise 
piicis just as would an incnase in yold itself. A eon- 
iiiviiii^ic iSMiie Ol iicW (iO\ ei iiiiieiit eicOit lii ;t Mii^ir 
I on. dry will in ('net inciiase prievs ail o\ i r uk world. 


:i 1 () 

MONJ.V .\\i) 15\NKI\(; 

Its lirst effect is ;i I'isc of prices in Ww issiiiiin' countrN, 
'I'liis means tlial imporls will incrc.ise. and exports di- 
miiiisli. I'inally uold nnis! he exporUd In setllemcnt of 
tile halanee. and tlius u()ld will tend to 
raise prices in the other countries. 

"J,)«i. ('/-((lit (iiiil spccnlalioii. Tlte nsc of credits, 
particularly hank credit, has a furthei- eJlVct on prices 
in that it fosters speculation. Speculation is that sort 
of huvinu' and selling' whicli does not lieli) to move troods 
alono- the chaMnei^ oi' industry and cointnei-ce from the 
pi-oductr !o the cousin, lei". The ohjeet of speculation is 
yain fi'oin the a(l\ i ni ilioii-, Ihiclualion of price and not 
from the natural inerenu lit in \aliie of Lioods arisin<' 
fi'om increasi'd utility as they ap])roach coiisumpti'j?!. 
Legitimate speculation tinds to e(]uali/.e suj)plv over 
loni^- periods and ada|)t it to the d( iiiand. thii^ minlnii- 
/\\\[X !hletllation>^ .if pi'ict ami di^t riliijt inu its i Ifeets in 
the least harmful \\a\ , 

llle,U'itiiiiate '^p( ■iilai ion increases lluctuations of 
price, either tli!'oi:i;h Iradiim in imiDi'an.H' ol' conditions 
nf supply and d( iiiand uv i.y niaiiipiilat in^ the markc! 
and causing t, inpniary ciianLi'es which arc iidl iustilicd 
'•y ■^I'l'l*') and demand. It mak.- ]triccs ahiHtruiai. 
iisiiallv aliii(irm;dl\ Iul:!! a! lirst. ri>Mnwcd hy a period 
w hell llicy air afnoriii.',II\ low. 

l»uck( t shijipiiiM and mei-e o'amhiiiio' im j)ricc (liic- 
tiiJitiouN are not relVri^d 'o lure: thoiiuh rcj)relicnsil»le 
in tli(iiisclves and iniuiidiis to puhlic morals, thev do 
not ( \erl any elfi i I mi prici s. It is onl\- wluii |ti'o|>- 
ert\ Is actually hoiiuht and sold, w Im-u the d< niand and 
supply an' altc i'(d. cjiaiim s in price result. 

-'u. llo'c sjx'ciilation nui// hi Imlh rfin\f dud (■//'ret of 
a ill jiiirrH. — 'iV* Imi\ propcriy. one i list h;i\c mean 
of payment. Spccidalion rci|uires that tin speeidator 


I i'M:( T OF C'Hl.Di'l ON I'liK i:s 


mist not only li;ive nicinis ol' payment hut tliat he must 
ic aide to hold j>ro[:ei-ty out oi' the market for ii time. 
Ill spei'ulation. tlien. eapi'al. instead of heiii^ invested 
])ro(lueti\ e entcrpri'-es and addiiiu' to the supj)ly of 
Is. is locked ii]i ill li'oods in the hopi' of profit not 
!'\- ])ri)diiet i\ (■ increases hut h\' a ri>e ol' prices. Pro- 
iliictive prolits arise i'rom an increase in the amount or 
utility of ,n'oods; s])eeulali\ i' profits from aitilici'd 
scarcity ol' ^oods. .Speculation is hotli llie cause and 
t ircet of pi'ice l!iictii;itions; a natural increase of price 
\'. ill start, often, a specuhitive hoom whicli soon makes 
mices ahnormally hiy'h. 

C'recht is the instrument of spei-idation. It furnishes 
ilie medium of I'xchanuc which iileases prices tiinpor- 
iiily t I'om tlieii' depiiHleiice on mone\'. and jxrmits 
;li(m to soar. It enahles persons with small ea))ital to 
|)iirchase and lio!il property. If credit were unknown 
and e\ery e\cliaiii4\' of projx ily rei|uired money, spec- 
ulation would siill exist on a small scah : iione hut cap- 
italists. howe\ei\ could (linage in il and tlu money 
which was di\eiied l(» the speciilali\e hiixiiii;' of one 
rMiiinioditx would he withdr.awn I'rom otlKi" usi s. and 
liie |)rices of otlu rs tliiiiLt's must fall. A 1^(111 :a\ spec- 
lijativc mo\inieiit, therefore, would lie inipossihie. 

So far we ha\e spoken ot' the ell'i ct of the various 
lorms of credit only as com))ar((l to a s\slt m in which 

iiiit IS iiol used. This was eipiivalent to coiisideriiiL!' 

ei( ly the ell'eet of an increase or expansion of credit. 
I' nniaiiis llierefdic to exaimiu' the ell'eet of prices of 

I CI ml ract ion of eredii . 

•J.')S. /),/'((•/ '//■ ')iir cnrmicii .si/slrni. — T'^iiforfun- 
lely this is tile ureal defect of our credil s\stem. I 'n- 
li^e e\|)ansi(iri. wincii is liia'iuai and aiw.i\s lakes piaee 

II answ<i t<i a d' ipiiid f'>i' iiiouex. conlraction of ci'cdit 



is likely to be very sudden. Moreover, it is likely ti 
oceiir after a long period of expanding credit and ris- 
ing prices; therefore the contraction and consequent fall 
of prices will he the more acute. 

We have seen that credit dej)ends on confidence that 
the debtor will be able and willing to meet his obliga- 
tions. If anything occurs to destroy this confidence, 
there will be a general demand for payment. More- 
over, it does not always take some givat ])oliticaI up- 
heaval to cause this disturbance, particularly if credits 
are greatly e\])anded and prices high. Any decided 
fall in prices in any great industry, due perhaps to con- 
ditions entirely j)eculiar to that industry, may cause a 
general slum]) of the stock market. This shrinkage 
in values causes doubt to be cast on tlie ability of debtors 
to pay, and such credits as are due are j)resented for 
payment. To meet these obligations, debtors must sell 
their goods and ])r()perty. Since no one cares to pur- 
chase, prices decline sharply, to be followed by still 
greater distrust, lower valu( s. further selling and so on, 
with cumulative effect. This process continues until a 
large portion of the credits have been li(juidated. 

This condition is not attributable to credit itself, but 
to our particular system. The great desideratum of a 
credit curreiic-y is elasticity- tlie power to r\])and when 
it is stretched and, what is more important, to contract 
of itself when tin- |)ull is removed. The amount ol 
nadily acceptable medium of e\ch;uige should, liow- 
ever, exj)and (juickly and without restrictions when a 
general demafld for liijuidatioti ajipears. Hence if the 
banks could issue notes freely in times of panic, a vast 
amount of credits might be li(|iii(laled without resort 
u) a depiction of tsank reserves. i lie < !}■( ct of li(|uida- 
tion on j)rices. therefore, would not be so eumidative. 

Kii'r.c'i' OF cui:i)rr on phrks 


!i should not remain outstandini;' l()n<4'ei- than there is 
an actual demand for it as a medium. AVlien times are 
prosperous and ])r()lits inereasin^' with rise in ])riees. 
stoeks lend themselves readily to speculation anil I'or 
that reason are a|)t to he ahnormally hi^uh. 

All the money in existence, however cannot be said 
to he in circulation, and hence is not oll'ered for goods 
at anv one time, liesides the limitation.s on the num- 
her of exchan<4es which the average dollar can niaUe 
within a given time, it fre(|uently haj)i)(ns that dollars 
aie hoarded for loi\ger or shorter periods; until they ai'c 
again put into circulation they might _just as well he 
iini\-existent so far as their effect on prices is i-onci rned. 
\Ioreover, the amount of the crtdil mcdimn of exchange 
wliieii is oll'ered I'or gooils constantlv \ aries. 

i ta 

I i 

> (I 


(i()\"i:i;\.Mi,\-i' ( Ri.iJir < ii;i! i:\cy 

2.')9. ( !,i.'-:,//if(ilii,ii i,f ;:;iivcni incut credit c/irrcnc//. — 
A lar.yv niiUMinl nl' the moiuy .siii)|)ly (.f tlu' riiit-d 
States coiisisls of CoMi'Miiuiii rrcdil. I 'luk )• thi:, luad 
must he classed the i;ir<ii!.;icks. \\\v tiTasui'v notes, yold 
and silver eertilieaks. sih'er dollars, and all siihsidia- v 
coins. Tlitsc are ail foi'nis ot' citdit niofuv. hecausf 
they derive their value as media (d' exehanue I'rom tin- 
(invei'nuK nfs ahilily and reachness to redeem them in 
.i^old on d( tnand. 

It is oh\ions, h<iucNer. that liuy do not all di'pend 
e(iually upon the ( .o\ crnnienrs o;i.||,.,-;d credit. Sii\er 
dollars and the suhsidiary coins possess a certain \al 


in themsrhes hecause of IIk' nielal they contain, (iold 
and sih. ti- certilicates ai'c uwvv warehouM' recei|)ts for 
an e(ini\alent amount of metal held in tjie treasur',. 
and d( p( nd only u])on tlu safe kivpin,^- of that metal. 
The ^i4ree.nhacks and licasury notes only are true creiliL 

Credit money should not he confused with Hat monev. 
We ha\( ah-eady notid that the -old dollar derives its 
\alue hoth I'roni the metal it contains and I'rom the (K- 
mand for' it as a. medium (d' e\chann('. Tndcr oui- sys- 
tem of fnc coinaL;c the supi)ly is regulated auto- 
maticaii\-. in ( conoiine spi celi. the n(,|d d,,||;,r is known 
as c( ^muiodil \ uionew 

hand, is any monev the suppiv of wjiich is rculated 

cuM:iiN.Mr.N r c ki:!)it ( riiivF.Ncv 


iiitilii'ially and the ilnnaiul for \\hicli is llie result oi' 
jK scr\ii'(.' as a iiicdliini of cxc'!iaii<4C'. It may \)v cnni- 
pKsrd of \ali!a!i!c metal, or it may nut: in any vvvi\\ it 
i> not its contents oi' conx nlihility, hut its cxclian^e 
utility that fixes ils \alne. 

Ci'edit money is a piomise lo pay eillier fia.t or com- 
iiUMhty moniy. i i' it is a diiect promise to pav. it is 
■-"!'! to !)e I'edeemal*]' . ;-l Kasi as ion^' as the promise 
!■> kept: if the rcdeiupl ion !-. sii-^peialed or if it does not 
ih pi^nd upon a direct pnaiiisv to pay. hut upon its cus- 
t"ni;iry redem])tio!i hy ilii- ( io\ eiaiment. it is said to i>e 
ii redeemahle. The diii'ei ri;e;> hetweiii iriH deemahle 
ei'edit and lial ii:oney is tliai '])'■ ;;()0(1 laiih o! Ilie (Jo\- 
( rnment is pledu^il to the redemption of th.e former in 
spite ot a ])eriod of suspension and its \alue ',\ill aluaxs 
!■(• iiifhienei (1 liy the pros])eet of its actual redemi)tion. 

■jrd. Factors (h'tcniiiiiiiiii tlic vdhic of cntlii nniiu'/i. 
- Since commodity money deri\es its value hotli froni 
the \alue of the metal it contains and fVoni the need foi' 
ii as a me<iium of exchan<4<,', credit money hased on ^old. 
w hethei- nominally redeemahle or not, d(.|)rn(ls for its 
\aluc first, upon the pMospn-t of the rtdemption and 
•econd, upon the supply of' laedit money relative to lie 
e\cliaiiuin<4' that is to Ik done. 

In an earlier chaj)lu' wf saw how the ^'rccnhacks 

Miictuatcd in value rtlati'.ely to i^old dui'inL>- the C'i\il 

W nv as their redemption sr;nn(l inuuediate or I'emote. 

i his was not the soU' reason. Iiowivai', for their fluctu- 

,;tion. Within narro\\er limits the relafi\e \alue of 

ricnhaclss lo n-old and of i^nods to irre( nhacks fell 

ilh each additional issue of notes. 'I'liis caii hardly he 
1 1 ..:i.. . 1 .1 I . I 1 : (• ii. . 1 ii. : . i .. i . 

3 ii 

ium more uncei'tain: if tlu' ( io\ ciaiment coulil redt cm at 
■ill. it x'.oiild mai.L' little dillVi'ence whetlur th( re were 

11 '< - 

> i 



SIOO.OOO.OOO nu)iT or less. It can iiioiv rca.sfM-.!,iy |„ 
attni)iitt(I iiKTcIy to an iiuTcasc of tlic money supplv, 
wliicli in itsi ir was snflififnt to raise prices. It is iin- 
possihle to reach any definite conclusion as to how miikIi 
of the liiK fualion was caused hy each ol' these in(hlenee^. 
I'lit it isclt';;r that they were liolli at work. 

In fact, wiien after 1S<;8 tlie (iovcrnnient siispen.iM! 
entirely tlie retirement of the -^reenhacks. they ei.n- 
tinned to circulate and even rose rapidly in value. Dnr- 
ino- the year that followed they were practically Hat 
mone; draw inn- their value solely from the demand (ui 
them as a medium of exchano-e. In ISC.'.), jiowever. 
Congress passtd what is known as the Public Credit 
Act. j)ledo-inM- tlieir icdemptlon in coin, so that they re- 
sumed their character of ertdit monev. 

•iC.-i. h'isk in free of credit //;o//e//.— The theory 
hehind the issue of credit money is that it economi/es 
the use of o-nld and i)revents price Ihictuations. Its 
most ardent adxo. aUs claim that it can become tjie sole 
medium of e.xehanoe in a nation witere confidence in 
the n-.,vernm. lit and its ability to redeem in no|,| js 
maintained. This confidence can be sustained l)y a re- 
serve of noj,| upon which the country will draw only 
for t!ie purpose of payino- f,,,- imports. Furthermore 
its supply can be ren-ulated and adapted to the varyinir 
need-, of industry: at least Mich is the claim. That' it is 
a dan.i^erous device, howevei-. the hi-tory of ahnost cverv 
nation shows. 

•J').'J. h't\iiulati,,n of credit ///o//(V/.^That credit 
money eeonomi/.s the use of nold is evident: lien.'c so 
far as it can be issued without ill eflVets, it must be a 
!)/ ii.fii o, •■ 1. .,(;,>., 'v\ .1 I • • -^ 

tion. The cU'cct of any issue of credit money on j)rices 
and ..n the money supply has alrta-ly been "mentioned. 

(.i)\ i:un.mi;ni' ( i{i:i)rr c ikki-nc v 


I'liccs risf ht'cjMisc there is niovc c'ii'culatiii^j;' iiu'dinni; 
tlii^ iiicreiiscs imports wliieh are always ciuiek to take 
;i(i\aiita^e of a risi' in pi'iee: ^old Hows out of the coun- 
try to pay for the imports. Prices tlieu fall somewhat 
ill the issuin<4' country because of the loss of <^<)l(l, and 
v\^c abroad: in the end, world prices are readjusted on a 
liiLiher level. 

This will take placi' \\h(iie\er there is an issue of 
iirdit money, \vhether it is I'edecmabk' or irredeemaltl''. 
As lon;^' us the issue is not excessive, tli;it is. as \ou;j; as 
Uii' amount of credit money issued does not appi'oach 
llie amount of ^old formei'ly in circulati<in, its effect is 
not dan^'crous. When the issue of either becomes ex- 
er^si\e, so that all the yold Hows out in payment for im- 
poits or is hoarded in ex])ectation f)f such a condition, 
the ciedit money becomes the standard of prices and the 
sn\c medium of e\chan,Gce, 

At such times it makes little difference whethei" the 
iicdit money is nominally I'edeemable or not. M,\en if 
it is redeemable and the ^'oxei-nment keeps a ^old re- 
serve for the purpose, it will soon be depleted because 
■ill ci'cdit money issued in excess of the monetary de- 
mand will promj)tly i)e ])resented at the treasui-y for 
rtilemption. When this leserve has been paid out, 
credit money of either kind becomes irredeemable in 
fact. The only difference between the two forms 
M ( ins to bf that irredeemable credit will drive tin <rold 
(lilt somewhat faster. A\'hen the ^'o\ (M-nment's ])roniise 
In pay is express, and a resei've is kept, public confi- 
'!( nee in the redemption will last lon^c r. so that hoard- 
nn- will jiot start as soon. In other woi'ds. a o-icater 

.... .....f . I' ... I ._ :....i..l.1 fl. ... i' :.... ! . .1 ! !l 

be issiK'd with safety. 

The iiionient that credit mont v fails to circulate at 

MTM.N AM) i5.\\KI\(, 

]);ir w itii l;i>1(!. IIk crfdit PDncy is said to !k' ilcprcciMti'd 
ciincnc)-. 'I'I'.is will take |)lacc' U^ui^ hd'orc all tlu' <4o|d 
lias lucii (lii\ni out of ci'-cnlatioii. 'I'jic standard oi' 
j)ric(.s w id l)c a d(!!d)lc one; i^onds will \)v pi-iccd so nil id i 
li)|- ,L;o!d. and a i^rcat-i' amount !'or tlir credit niotiex'. 

■_'(;i.. .Orr/cr.v to iimniiaiii v/iliic of crcdil iiKiiicf/. It 
has liccn Hie history oj' ci'edil nioiuy tliat cirorts arc 
Usually made to kec]) llie credit circniatinu' at |)ar with 
,yi)id hy making it lcL',al iendei'. This mean^ that il 
must he accc|)ted in paynunt ol" all dehts. While tlii 
l'catiii-c increases its elliciency as niotiey. and theoretic- 
ally makes it a iiiore ])ci'('eet sul)sti[iite foi- ydld. it is a 
mistake to cencliide that ii will ])r(\('nt d 'preeiation. 
\Vi ha\c seen that Ihe \alue of ( reihl mont\- depends 
ii)st upon the prosp. ct rA' its rcdcm|)tion and second 
upi/ii its suj)piy relali\e to tlie money work which is to 
he done. Tiic leija! '(iuh r stamp does not increase the 
])rospect of redeiiiplion of icdecmahlc credit, hecaiisc 
for that the ,l;o\ (.i-nmer.f "s faith is already delinitelv 

It is only when credit money is irredeemable that 
niakin/;' it le.ual tei;der to i)i'e\ent depieciation is hene- 
licial. In this ease, the ;^o\ernmtnt is not alread\- dcl- 
initely plcd-^cil to redeem the credit, hein-e anythinii 
attaclu'd to it which is an e\ idencc of the _ii'o\ ernments 
,Uood faith inci'-'ases puhjic contidence in its re(Iem})tion. 
The piomisi' to aeci pi it in payment of debts to itself is 
(>b\ iously an e\ idencc of its purpose to redeem. 

2<»."). f/'/T-; /•//'"( 7,7 rr((lit iin/ "idifil iii(,iu\//." It must 
h' aduiitted i:. support of tiio^e theorist, \^■ho advocate 
I'le nse of u-nvernincnt cr( dil as the "ideal moiiey"" that 
i' has hi ell tri(d Usually under Ihe most inaiisijicious 
c:reunislances its issue ncneraily ha\ inu been rcsortt'd 
'.\ars or to maintain pros])eia't\- whi( ii 


> oiii\' to Ini; 'ic 

(;()\ iiKN.Mi'A'i" ( iii;i)ii' ( ruiii.Nt ^ 


lias already <4;r()\vti im1i(.'altliy. If it (•(uild ln' issued 
witli the sole aim of steadying prices under I'lm- 
(litioiis wliieli woidd necessitate its rcdeaiption wlun 
the nei'd tor it disappeared, it might Itecome a \ery 
iffeetive instrument in the hands of a com])etent gov- 

Its issue on this theory is im})ractical)le, however, hc- 
eause automatic redemption is impossihle. When eon- 
tidence in the government is genei'al, all forms of credit 
issued hy it find their way into the clKUinels of trade, 
causing a rise of prices. As long as confidence is main- 
tained, they will continue to he a part of the monev sup- 
|)ly hecause there is no motive for their redemption. 

'JG<>. Difficulties of adjuntintr suppltj. — Moreover, it 
would he unsafe to give to Congress or to any associa- 
tion of hankers the power to expand and contract the 
money su])})ly artificially. Congress 's not always well 
iid'ormed of the husiness needs of \he country; and 
hankers must always have personal and selfish interests. 
The effect of a sudden contraction of the money su[)ply 
as seen in panics is well known. Moreover, the power 
to regulate the money supj)ly would include the power 
to inflate or de])ress the price level. We are forced to 
the conclusion, therefore, that this credit has heen well 
named "ideal money" 1 y the theorists; "ideal" because 
it presu])p()ses a state of technical knowledge on the part 
of legislative hodies and .d)sence of self-interest which 
we may expect with the millennium. 

Irredeemable credit money may circulate at par with 
ii,()ld if the issue is not excessive and if there is general 
confidence in the goverrmient. In this case the govern- 

tiipjit line jidf niviiiiic<>f I fri r<i(I(ir>i>) tho mnnp^' Imf it fir>f>« 
*'*' i .'* 

SO in practice, receiving it itself at par with gold. This 
is not fiat money hecause it derives its value not entirely 

VII -15 




from its exchange utility hut from tlic /rovcniment's 
actual redemption. The silver dollar has heen a good 

Unfortunately, however, government credit money 
has seldom heen issued in response to a demand for 
money as a medium of exchange. It has heen issued 
largely in resjjonse to the li: ca! needs of governments, 
that is, to meet extraordinary increases in current ex- 

'J()T. Prrji'diccs nffdinst government credit monetj 
before 18()1. — This has heen especially true of the 
Ignited States. The Constitution gave Congress the 
power "to borrow money on the credit of the L'nited 
States"; also "to coin money and regulate the value 
thereof." In the Constitutional Convention a proposi- 
tion to enable Congress "to emit bills of ciedit was de- 
feati'd, it being the sense of the T'onvention that j)apcr 
money was dangerous." The history of the Ciovern- 
nient shows that the dislike (>f paper money, no dou!)t 
a survival of the days of the Kevolutionary bills of 
credit, must have continued until IHOl. Oti ordy three 
occasions prior to diis time had t'casury notes becii is- 
sued, namely, during the War >f IHTJ, the panic of 
1S.*{7 and the Mexican AVar of ISiT. ^foreover. thr 
aggregate of these issues amounted to otdy $1 I(),()()(),- 
()()(). ;nid ill ewry ease the notes were interest-bearing, 
and n( \ei- attained general circulation. 

'JfiS. rinanciiif/ tin ('nil ii\ir. The opening of tiie 
Ci\il War brought extraordinary con(hfioi\s. Money 
had to bi iaiscd at once tor eonductiny the war, an<l in 
laig( sums. Should tlic (government "borrow monev 
on ilir credit of IIk Cniled States," or should it create 

iiK'-tiiy i'V i-'Siiiiig its iiOH S ili'tii C . iOWiJlg TiU'lli Wllil liic 

legal tender feature!' Tiie former it was empowered 


in do by the Constitution and could have done by tlie 
sale of bonds. (io\ ei-nnient !)onds are a form of nov- 
( rninent eredit. i)ut they are not credit money, as they 
ale nv)t payable on demand. The market for bonds was 
not o-ood. however, and Conufress chose the latter 
method as less e\i)ensive. tliou<ih the constitutionality 
was very doubtful. It may be objected that "the jmwer 
lo borrow money" inehidi'd the liyht to issue notes. 

In req'ard to this |)oint. tiie distinctions between cap- 
ital and money must be kei)t in mind. I'lom the busi- 
ness man's staii(Ii)oint what the (lONernment really 
needed was working"- capital. No business man would 
tliink of issuing demand oblij^ations in exchange for 
eajjital ^'•oods, particularly when there was no prospect 
of an immediate increase of rever- -e with which tci meet 
'he obligations. The business man's obligations is- 
M!«(| under such circumstatices would be lon^-time cred- 
its in lh< iOi'in of bonds I'ui-thermoi-e. there was no 
necessity for an increase in the money supply. Trices 
were suthcicnlly hinh. What tlu- (iovernment wauled 
was not money but purchasiiiii' power and this it could 
Iiave l)orrowed wi'Iiout increasin;^- the supjjJv of money 

•J(i!). risddvdiila^Y of ^oicnnncnl dthl. — (iovern- 
nicnt credit always represents a ^ovenunent debt I'l 
this coiuitry \\e l;a\f become so accustomed to havinn 
a government debt that its e!cm< >» . of weakness ace sel- 
dom analyzed. Our prospciit\ -ratois point with pride 
to tlic fact that the I 'nitcd States is the oidy nation in 
liie world wbicii can sell lionds that pay cnly 2 per 
rent inl'ics'. This is applauded as an e\ idence of j)ros- 
perilx, witl.oui .•ina.hsLS. wit!" no thoupb! lb;!! \\>.i- mvv 
|>resetice of a (h l)t on the books of anvone. excn of a 
nalioii, must always be a weakness. In what respect 

( -I 







should a yoxminicnt's financial activities diifer from 
tliosc f)t' a \\(ll-ic<4ulatc(l husiiicss' Do not the same 
principles nriikrlie them hoth' 

The husiness man will n-^t horrow until lie has already 
devised a lime and method of jiaymcnt. As we have 
already noled. the I'orin in which he will horrow depends 
upon the disj)()sition he wishes to make of the credit, 
ir he expects to add to his fixed capital, he will horrow 
hv issuing lonn-time credits, expectin<^ either to pay 
them Milt of his profits oi- to rene\r them at maturity. 
II' he merely wants the use of funds for a short time, 
he will issue sliort-time or demand ci'cdits. These he 
w ill expect to meet out of tiie proceeds of his sales. 

•J7('- (roirnnnriit drhf. — When a j^-overnni'iit bor- 
rows it does so for current expendituiis. These may 
he for permanent imj)rovement. such as federal build- 
ings, harbors. caJials, which will benefit the public gen- 
erally and flu cost of which should be spreajl over the 
j)eriod of their usefulness rather than be met out of 'lie 
re\c"iue of a sin^''le year at the time of ex{)enditure. 
.V fa\()iite expression is "to let posterity ha\e its share 
of till' burden." The ^o\ermnent bonded dei)t in 1870 
•unounted to S-_\;{.'n,l()'. >,'.).)(; ; in l'.»()-J it had been re- 
duced to .^^'.CJ.-i.Ol l.(;.'ii». 

'i'h( income of a "^'overnmcnt is ;ncnerally s})oUen of 
as re\(iiue and is deiixcd entirely from \ai"ions methods 
of taxation. If wi' wish to cany out the analogy be- 
tween the ^oxeiiiment and the Imsiness man. we may 
say thai the di Its iciiccs bctwce?) the rcMiiue and ex- 
penditmcs in any one year are profit, and that it is 
with this profit that thi' bonds are retired. The issue 
of bo!i(]s, tlii'ri'! <>re> \\b<,'!! the !>roceeds n.ot souiui- 
(icred, rests on a firm business basis. 

gum:hn.mi:nt credit currency 



The issue of credit iiioney, however, pre.seiits diff'er- 
riit j)rol)leins. When the husiiiess man issues demand 
credits he purchases something sahihle with tlie j)ro- 
eeeds, and expects to he in a })osition to retire the crecht 
at any time. The oovernment on the otlier hand merely 
spends the money, usually to meet some extraordinary 
expenses, and then has nothing to show for it. If it is 
a war that has heen financed, as in the case of our green- 
I)acUs, it iiad a perfect right to horrow for the jjurpose 
just as it would have to make permanent improvements 
hecause, on the same theory, posterity should help hear 
an exi)ense from which it will henetit. If it does that, 
however, a provision for redemption on demand must 
he made hy the estahlishment of a suflicient goKl re- 
serve; hut to rest on a husiness hasis, more is necessary. 
Posterity should not hear the !)urden hy keeping the re- 
serve always intact hut hy actually retiring the demand 
credits. l{e<le!ni)lion in gold on demand is not sutli- 
cient. These credits should he canceled just as the 
honds have heen canceled. 

'271. Demand dcht.s a xccakiicss. — A deht is always a 
weakness, hut especially so when j)ayahle on demand. 
it may he well to examine the claim made hy the advo- 
cates of the issue of greenhacks that their issue would 
result in a saving to tlu' government. The argument 
that turned the tide of hattlc in Congress was that in- 
lerest-liearing honds could l)e sold only at a coiisiderahle 
discount, whereas the non-interest-hearing notes could 
he issued at j)ai-. in otlur woi'ds. a large saving was to 
!»(■ eil'eetcd \]\ the intirtst account. 

In an earher ehaptei- the pi-etci-iiice of husiness men, 
who (Kid in aoods which air not nlwavs mar'.xctahle. for 



jtlll'^ (INll .sjliirl Tiiiif tifinS Was iMiiiiiru iiiir. i'iii'iiiv r 


mo\t:v and i?amvI\(j 



more, it was sJunvn that tluy will often pav a hiolier 
rate of interest on 1„mo- time loans siniplv to inake 
tlieir business more seeure. A o-,,,,,! example of the 
prelerenee has been shown I.y the issue of .$.'J(),0()(),()()U 
1" J'onds l,y Armour .V Company of C'hicaK,). Tliese 
bonds bear 4i _, per eent interest and were issued when 
the eommercial rate was less than t per eent in spite 
of the faet that Armour cV Companv always had a 
ready nKirket for their short time credits owino' to their 
reputation an.l the (piiek convertibility of their })ro(luct. 
The -■overnment does not deal in "noods at all. j 

only method of meetmo. oi,lin,,tions is by doin^r so (.it 
of its excess of revenue over expenditures or by re- 
f inuhn- them. The h'rst must always be a slow process. 
In .ts ability to refund only does the oovc-nment have 
:"! advantau-e over the business man: and even uiis 
"bdity may be cripple.l at critical times, so that in re- 
hmdin- . loss greater by far than the interest ori- 
Hinlly would result. It is obvious, therefore, that the 
l>'"per business policy would be to avoid the issue of 
demand cn.lits. in spite of the original savinir of ;„. 
tei-est. " 

•272. rrovislon. for rrfinn:^- dcht.- \u any event 
iowcNc.- whether a d, bt .o incurred is in the ■form of 
I'oiids or notes, provisinu for its can.-ellalion sluudd be 
ma.le. The smalier the d.b'. the oreater the nation's 
'""•".muin. pouc...,n.l tliereisnotcllin^when thisbor- 
rouinupowermay beMe..ded. II is„..l a correct busi- 
Mcss pohey to aHnu a debt Ineurn .1 durin- on<. period 
"1 stnss t,, .villain o!itstan<lii,n |,. ,•<■, imv the ..-.wen!- 
"Hiifs endit when anolinr p. rio.l of stress appe;7rs It 
sl.ould be paid oir in prosperous years, so Ibal when an- 

1 I 

tin" S i ,■ i 7 1 

ernment's cndit unimpaired. 

'Mii iu- eic.'-.ii and the j-oy 



273. Productive industries classified. — The economic 
life of a coninuiiiity consists in the production and con- 
sumption of goods. The production of goods becomes 
more difficult and comphcated as the wants of men 
grow and u great number of auxihary institutions be- 
come necessary. Banking is one of these institutions, 
developed to assist in the production of goods. 

The institutions which carry on the process of pro- 
duction may be classified in three groups. 

1. Those \\hose purpose it is to extract raw materials 
from the earth and to adapt those raw materials to 
lunnan wants —therefore, the activities of agriculture, 
mining, manufacturing, etc. 

2. Those whose pvn-[)ose it is to transport materials and 
finished goods to the place where they can be most ad- 
vantageously used. 

3. Those whose purpose it is to as.sist in transit rring 
the ownership of materials and finished goods so that 
they may come into the possession of those persons who 
can use them most advantageously therefore, the ac- 
tivities of retail and wholesale merchaudising, broker- 
age, coining and issuing money, banking, etc. This 
third group of economic actiMties is not absolutely 
necessary to the economic ])roccss but is a conseiiuence 
of the private ownership of materials and the means 
oi' t>!'()(!!!ct!')!K u»>dcr a thoroutrb socialistic regiine these 
institutions would be Mj[)ertluous. 





274- lii'iutpihildt'uni of fundamental principles. — 
rndtr our present system of private ownership of 
weaKli and the division of hibor in {)ro(hiction, frecjuent 
transfers of ownersliij) are i-eiinired. Kxclianne is an 
absolute prerecjuisite to any hut the most primitive 
form of i)ro(hietion. Only an insi<riiitieant portion of 
tile ^j-oods pnxhiced are consumed hy tlie producer; they 
were made to be exelian^anl for otlier goods. In the 
process of manufacture most goods change liands many 
times l)efore reaeliing the consumer. 

These eleme?itary economic facts are recapituhited 
for tlie i)urj)ose of em|)hasizing the importance of ex- 
change in our economic hfe. lender an economic sys- 
tem of private ])roperty tliere could be no civilization 
without the means of exchanging one form of propertv 
for another. 

'''he exchange of one goods for anotlur, however, 
involves considerable diHiculty. In any exchange there 
must be two parties, each desiring the article wliieh the 
other wishes to part with, at the same time and place. 
These conditions must coincide in order to make an ex- 
change possible. These obstacles in the way of l)arter 
led early to the use of money, whieli was a commodity 
enjoying so universal a demand that everybody was 
willing to accept it in exchange for his goods. 

Jii order tli;it production shall be most successfullv 
carried on— that is. that goods of the liighesi (lualitv 
shall be produced in the largest (juantity. it is necessarV 
that each person shall be set to do the thing at whicii 
lie is the most skillful and that he shall be aliir to make 
use of the proper tools and materials. It is necessarv 
that the i-apitai ri'sourees aiui the labor force of the 
country should he l»n>uglil together and organized in 
the most ellicient way. The number of persons who 



arc capable of heconiinf,'' organizers of industry — entre- 
preneurs — is limited, and these are not usually the own- 
vvs of capital. If the coniniunity is to utilize the expert 
abilities of these ca})able but i)ropertyless entrei)reneurs, 
a method must be pro\idc(l by which they may come 
into possession of cajjital without bein<r recjuired to give 
an equivalent value immediately. So we have the insti- 
tution of credit, which is the third step in the dev. lop- 
nient of exchange — barter, money, and credit. 

27.5. Credit.— A credit is a deferred i)ayment. In 
exchange for valuable })roperty, one of the parties to 
the transaction gives his promise to pay a certain sum 
of money in the future, or, in other words, lie gives his 
creditor the right to demand a certain sum at u future 
time. The value of this right dejjcnds of course upon 
the certainty oi' payment at the future time. This de- 
pends further upon the character and ability of the 
debtor and upon the aid afforded bv the law in enforcin<>- 
payment. A ci-edit, therefore, is a contract to pay 
money, and is usually evidenced by a written instrument 
for the further protection of the creditor and for the 
purpose of making the contract negotiable. The fact 
that credits in the form of negotiable instruments are 
transferable add enormously to their utility as media 
i>f exchange. 

27(5. Jiaiih- a dealer in credits.— 'Vhv business of a 
bank is to deal in credits; it is a market for the pinrhase 
and sale of credits. It is an institution the fimction 
I if which is to assist in the exchange of goods by facili- 
tating the use of credit as a medium of exchange. It 

is with credit as with any salable commodity — the exist- 
...w..> ,>P .. ..... ..l-,.t^ ,..1 :i 1. Ill 1 I 1 

■::v-. \ri ii ii;.;: r.-^ ■.. ;-. ;:-^:l ;; i;;;;", ;;v" Jiwiigiil iiiiii ."XJuI 

increases its use because a demand for it is always 
assured, lianks are an economic beneJit to liie commu- 



^iom:v and banking 









riity to the extent that they promote the exchange of 
goods and services, to tlie end that the material resources 
(capital) and the labor force shall be most advanta- 
geously emjjloyed in the best possible organization and 
that the finished products shall find their way, with the 
minimum of delay and difficulty, to the best markets. 

Every excliange. excejjting mere barter, involves the 
use of a medium of exchange. Money and credit are 
the two media of exchange. The term "money" is now 
used by economists to mean simply the standard of value 
which, in most countries to-day, is gold. Where the 
gold standard prevails, all other forms of currency — 
token coins, government notes and bank notes — are 
credit currency. The government usually undertakes 
to provide and regulate the metallic coinage of the coun- 
try, but leaves to the banks the task of providing and 
handling the credit currencv. 'I'he Tnited States imes 
further than most European countries in concerning 
itself with the credit currency of the country by issuing 
"greenbacks," and Treasury notes, and by guaranteeing 
the redemption of national bank notes. 

In England, as well as in most of the larger Yaiyo- 
pean countries, to the banks is delegated the function 
of managing the credit cu"rency; of course, under re- 
strictions more or less stringent. The point to be 
observed in this, and one \\hieh has been urged by sev- 
eral of our rec^'t writers on money, notably C'onant in 
his "I'rinciples of Money and Hanking," is that the 
iiandling of credit, evi-n of credit currency, is properlv 
a banking funetio?i ratiier than a governmental oiic. 

Credit jis a medium of < xchani. <■ varies in form all 
the way from a national bank ooti , whicli na.sses from 
hand to hand as freely as a gold coin, to a mere verbal 
promise tr> pay (. \ idcnccd by a niemora!idum in a ledger 



wliich, often as it has served in one excluingc, is but 
rarely negotiated further. ^Vrranged in the onkr of 
their negotiahihty (tlieir servieeabihty as nie(ha of ex- 
cliange) between tliese two extremes, we liave the cer- 
titied cheek, cheek, draft, l)ond. ])roniissory note, etc. 

277. lianlcs supplij a medium of iwclian^c. — Hanks 
perform the function of sup|)lying a me(hum of ex- 
change in two ways: (1) by the issue of hank notes 
intended I'or general circulation, as the national bank 
notes, and (2) by granting, in exchange for a cash de- 
])t)sit or an interest-bearing note, its own credit which 
can be used by the customer as means of payment by 
drawing a check against the bank. 

The function of providing a medium of exchange 
for a community is essentially a public one and is pecul- 
iarly liable to abuse if left without restriction in the 
hands of private parties. Before the Civil War this 
country suffered severely from badly regulated issues 
of bank money and, since the National Bank Act, the 
right to issue paper money has been limited to national 
banks under very strict regulations. 

278. Hanking is a quasi-public function. — The right 
to furnish a medium of exchange by the system of checks 
and de]>osits still belongs to every bank, but in all cases 
it is regulated cither i)y federal ov state statutes. In the 
Ignited States minimum cash reserves are re(iuiri(l to be 
kv\)[ and in many other ways the i)iiblic nature of the 
business is recognized. 

Besides the quasi-public function of jiroviding a me- 
dium of exchange by the use of credit in one form or 
nnother, banks liave anotht r function closely allied to 

if- titlfl <.-<\«>tjitll^^i>(.' (.'/Id l>f 1/ ill' 4-(t l\it jIi 

.^:., ,„..:. I. ...J I- 

to supj)ly temporary capital to industry in the form of 
short time loans. 



In th 

'd>j;(-\ scarce any iiuhistrv can ht- carried 


without capital. It is very rare also that the best pn; 
iiioters and managers of industry are tlie i)ossessors 
of the large am unts of capital necessary to carry on 
the business. On the other hand, a large })()rtion oi' the 
country's capital is in the hands of those who have no 
ability to emj)loy it successfully or it is scattered about 
among tiie people. To get this cai)ital into the hands 
of the entrei)reneun ..iio can employ it most profitably 
is a function largely assumed by banks. 

•271). Tin- hank a (li.stribiitor of capital.— Cainial is 
employed in iiidustry in two ways. Some of it must be 
invested in the plant and machinery; this is fixed cap- 
ital. Another installment must be invested in materials, 
labor, incidental exj)enses of production, etc., the neces- 
sity for M-hich arises out of the length of time required 
to manufacture and market the product. There is 
naturally great variation in the length of the period 
of production in the various industries. In some of 
them this circ' ;ting capital must be tied up for Meeks, 
in others i'or wars. 

The distinction between circulating and fixed capital 
IS that the former ai'ter a period reappears in the form 
of a salable {)roduct from which is realized the value of 
capital invested and something more in such shape that 
it can be reinvested; in other words it is fluid, whereas 
Jixed cai)ital remains in the form in which it is invested 
and only l)eeomes fluid as a replacement or depreciation 
fund is accumulated or the plant is sold. 

This distinction has value in the science of 
banking, for as we shall see later, the credit which a 
bank loans has a very precarious existence and it may 
become necessary to withdraw it at any moment from 
the enterprise iti which it is invested. The restrictions 



wliicli leoislal n\ has placed njxm the nianiicr of loans 
a l)ank may 'iiakc are vciilly hased upon this j)rinciple. 

2S(). Ihuilcing priuciplc. — A lar^a- proportion of the 
hank failures of the country is caused hy a violation of 
this fundamental hanking- principle. The National 
Hank Act forhids hanks to loan on real estate or mort- 
oaacs. The idea hack of this i-, to ])revent the lockin<; 
up of funds ii fi 1(1 capital. The faihu'e of the three 
Walsh bai. s in Chic'^o in V.m\ occurred hecause the 
funds of tlic hanks had been used to huild railroads 
which some dav mav he \erv i)rofitahle, but which for 
the present tie up capital where it cannot he easily 
turned ijito a means of payment. 

The reasons why hatdv funds should not he tied up in 
the form of fixed ca[)ital are: 

(1 ) The value of the investment may he unstable. 

(2) The value of the investment may depend on the 
completion of the whole plant, as in Hie case of the 
Walsh railroads. 

(3) The value of the investment may depend upon 
a monopoly or upon the ability d' > ;ie man, so that if 
the peculiar advantage ceases to exi^ the property 
shrinks in value. New processes may nuike old plants 
entirely obsolete and destroy their value. 

281. Double function of commcrcinl hanhs. — The 
function of a modern commercial bank is therefore two- 
fold: (1) To provide a means of payment and (2) 
to provide temporary capital for the use of industry. 
It will perhaj s he well to show brietly how these func- 
tions were developed. 

One of the early banks, the liank of Amsterdam 

was the conmn rcial center o\' Europe at that time, and 
the currency in circulation was a heterogeneous mass 

1 .; 




of the coma-c of all the mio-hhorin^v and .h'stant conn- 
tnes, of murrtain \ahic a..,l f'miuentlv Mmtllated 
S.K'h a currency seized the needs of connneree ^cvv 
I'a.Ily, and the J^mk of Anistenh.n, uas oroani/.e,: to 
reheve the diHicnHy. It received deposits of this niis- 
c-elhmeous currency, calcuhited its vahie on the })asis of 
a fixed stanchu-d and permitted the depositor to transfer 
l'>s credit at the hank. The deposits were all kept in- 
«act in the l)ank, or at least were supposed to he As 
;i matter of fact, the si^rht of so much idle money seem- 
I'l^ly doui^r no ^rood to auyhodv in time proved too 
stron^r a temptation to the mana-enipnt and thev from 
time to time ])ermitted lar-e sums to he used in 'financ- 
ing,^ hazardous ventures, principallv the colonial enter- 
prises of the Dutch Kast India Company. When these 
tacts hecame notorious the depositors lost faith in the 
hank and it was compelled to suspend. This hank per- 
lormed a hankino- function in diat it provided a ^.ood 
iriedium of exchanoe, h„t it did not deal in credit in 
any other sense than a -rain warehouse man mIk) is sim- 
])ly under ohii-ations to return the deposit on demand. 
_ In the IJank of Knu-hmd {nm} we find the hunk- 
in^r i unctions considerahly developed. In considera- 
tion of a li)an to the ^nnernment, which at that time wis 
m sore need of tunds, the suhscrihers were given the 
exclusive right to organize a hank which should have 
the privilege of issuing notes payahle to the hearer and 
which were intended to circulate as currency. 

Here we have the essential element in "hankino-— an 
organization which is ahle in some way to create credit 
at small expense and which it may loan'out to the puhlic, 
deriving an income therefrom which leaves a nrh nrofif 
above expenses. In other words, the bank is able to 




])ro(luce somcthir;^'- cheaply and to rent it out at a (rr- 
taiii rate per cent. The f'ollouiu^tr features were a part 
ni' the creation of the credit of the Hank of Kn<>'la(id: 

(1) A siihseriptioii of funds nhieh sliould he loaned 
to the ^oveniuient al 8 per cent. 

(2) Notes must he jirinted, counterfeitintr guarded 
a<,''ainst, an othce for doin<,r husiness and redeeming the 
notes must he maintained. 

(.'J) A demand for currency nrust exist so that the 
notes will n^main oulstandiiiir. 

282. Peculiar privilege of hankers. — There arc a 
^reat many persons and firms who can create credit, hut 
the hanker is the only one ahle to dei-ive an income from 
loaning it out. The reason of this is that the hank- 
credit is in such form that it can he used as a means of 
payment and, therefore, will he received and held by 
the puhlic so long as there is need for it to do the 
necessary work of exchange. 

Naturally a husiness in which the stock-in-trade can 
he produced at very little expense and can be loaned 
out at from 5 i)er cent to 2.5 per cent per annum is 
peculiarly attractive and liable to abuse. Until the pas- 
sage of the National ]Jank Act, the United States had 
to suffer many and heavy losses through the insulficient 
regulation of this important function. It took us all 
those years to learn that the function of supplying the 
I'urrency of the country is a pul)lic one and should he 
delegated to private parties only under the most strin- 
gent regulations. 

lender our present laws the privilege of issuing bank- 
credit to be used as currency (the national bank notes) 
posts, the hank nearlv ss much, as th.e incojiu^ derivcf! 
from loaning the notes and, furthermore, a Inrgc part 



of the con II try's need for credit currency is supplied 
by the <4-overniiient itself hy issues of "greenbacks" and 
Treasury notes. 

liy far the largest portion of the payments in ])usiness 
trnnsaetions are made by the use of credit in another 
form than currency, that is, 1 means of the check or 
draft. 'J'he service of the banks in providing currency 
is really insignificant when compared to their service in 
furnisliing a method of j)ayment by click. 

The essi'iitial element in the e!.cck system is the same 
as in the bank-note system, viz., bank credit. Instead 
of selling, or more jjroperly, loaning its credit in the 
form of baidv notes, at a certain rate pf-r cent, the bank 
loans the right to draw checks against it, which checks 
can be used as a means of payment, but to a much more 
limited extent than bank notes and with a much more 
restricted circulation. The principle underlying both 
systems, however, is the same. 

The |)eculiar cliaracteristic of a bank is the privilege 
of using its credit as a medium of exchange. This 
gives its credit a utdity enjoyed by the credit of no 
other organization except the government. IJecause 
its ci'edit has this uiiHty it can be kept outstaiiding witli- 
out the i)ayment of interest. The principal business of 
the bank is to exchange its own credit, in the I'orni of 
baid< notes or a deposit credit oti its books against which 
chicks may be drawn, for the i-redit of someone else in 
the form of a promissory note bearing interest. ( 'nder 
ordinary eircnmstanees neiiner the bank ?iotes nny the 
deposit credits beai' interest, conse(iuentl'- Ihe banK "-ains 
i)y the Iransaetion a gross jirofit e(]nal to tiie interest 
on the pro;iiiss(«iv note. In order to make this j)rofit 
it is necessary thr bnnk-"redit should be kept ouf- 
standini^ and not be returne(i to the liank for payment. 

ECONOMIC ruNcnox OF Tin-; hank 


Credit is simply a deferred payment and this hank- 
i '. 'it represents a payment dne at any time the posses- 
eliooses to call for it; if it is in the form of a hank 
lie may present it for redem|)tion in eash; if it is 
... the form of a dei)osit-ere(ht he may (h'aw a check 
and casli it at the l)ank. Now, if hank notes were re- 
deemed soon after their issne. or if deposit-erefhts were 
elieeked a<rainst and the checks caslied soon after the 
cre(ht was granted, tiie hank wonid not he ahle to keep 
its credit, having no interest ontstaiuh'ng. It wonM 
gain the interest on the promissory notes purchased hnl, 
since it liad to pay cash for them ultimately hy redeem- 
ing the outstaiuhng cretht given for them, the whole 
transaction woidd he e(iuivalei:t to loaning money at 
the current rate of interest, nothing mo: or less. 

In actual practice, however, the hank is not compelled 
to redeem its credit in cash immediately, hut is ahle to 
keep it outstanding for some time. In case the hank 
puts out its credit in the shape of hank notes, the puhlic 
need for currency keeps them circulating from hand to 
hand and serving the same j)urpose as money; as th-jre 
IS no need to exchange them for money the haid< is not 
<alled upon to redeem t; em. However, this no longer 
applies to hanking in the Tnited States since the \nW\- 
lege of issuing hank notes freely has heeti taken away 
I'rom the hanks hy the National Hank /Vct. 

I nder the jjreserd system of hanking in this country 
the hanks can i.o longer put out their endit in the 
form of hank noles. cxeepi ii< the case of national hank 
notes where the restrictions u|)oi> their issue aic so many 
that their .haraefer is (|uile ehang-d; they [io longer 
rej)rescnt the credit of \hr issuing hank hut the ere.Iit 
of the goxernmeni in the shape of a I 'nited Sl.ihs hond. 
Having hern deprived of thi- one method of kee,)!n" 

I i 



\!l Hi 

O It) 



their credit oiitstaiuliiig by the issue of bank notes, the 
banks have made use ol' another nietliod, the cheek and 
deposit system, which serves the same purpose but which 
is more dilJicull to understand. 

•JH.'J. liduJcs ill) not create cdpital. — Dunbar says in liis 
little book, "The Theory and History of Banking": 

It I? obvious thfit tlic hankers cn'dtc no luw cajiittil by their 
letidin^ and deposit lioldiii^-, \n\\ it is e(iiial!y plain tliat the\' 
direct tlie stream of (';;pital to the enterprises and industries re- 
(juirinij; such support, and fliat tl \ quicken the succession of 
{•onunercial and iii(lu>ti'ial opirat ions. A ^ivcn amount of caji- 
ital is tiuis made more elt'ective, so tisat the re>ult of tlie introduc- 
tion of liankiiif;- in anv conununitv is the e!iu!val< nt of a coiisid- 
erahle increase of capital, althoujj;h not implying any real increase 
in the tir>t instance. 

Indrstry is impossible without two things: Capital 
and ni iiaoement. \\'ry frecjuently the class of per- 
sons owning the capital are not capable of employing 
it in industry to the best advantage, and many |)ersons 
of ability have no caj)ital. It is the function of the l)ank 
to bring the two together for their mutual advantage 
and thus promote industiy. 

It is important to get the distinction between capital 
and eapUal goods. Capital goods are those material 
things which are employed in the further production 
of goods, such as iiachincry. factoiy buildings, raw 
materials, and goods in the hands of merchants. Cap- 
ital is a certain sum of' vahr so many dollars worth 
from uhi<h the person owning it expects to get an in- 
come. Capital goods wear out and <lisappear. but i i])- 
ital survives in tlii' form ol" rej>laccmcnt and sitiking 
funds undir normal conditions. 


A fju'toiv iiKiy he turning- out sonic form of capital 
uoods iiKu-liiuery, for example— and at the same time 
there may l)e entrepreneurs desirin^r to make use of 
!hat maelunery in ])ro(luction hut liavin^r no ready 
linids. J'he inakers of the machinery cannot ])art with 
the machinery mdess they ^et some form of medium 
nf exdiano'c nitli which to pay the'r hills for waoes, 
tnaterials, etc. The hank ste|)s in at this point and 
< iiahles the two parties to ,<ret to<,a.ther to the advanta^re 
"f hoth themselves and the community. The maclMnery 
company cith-r takes a note from the entrepreneur anil 
uets it discc ,it(. ' at the hank, thus chan<rin<r a non- 
'■irculatin<v I'orm of credit into a medium of exchan^re 
with which they can j)ay their hills, or they sell the ma- 
chinery on time and horrow from the hank enou^dt to 
pay running expenses until the account shall have hc- 
t "me due. 

rroduction requires a laj)se of time and the owners 
iif the cai)ital employed must wait until the goods pro- 
duced arc sold hcforc they can get hack their capital. 
The hank takes the hurden of waiting from thos' who 
liavc to emj)loy their capital more rapidly and places 
li on those who are content to wait so long as thev get 
in incorjie for it. 

•J'<lk Soiinr of ('u/)iltil ami crcdif of hank. 'Vhc 
sources nf the capital and ciedit which is the stock in 
iiadc of the haid<: (1) C'ai)!tal stock suhscrihed hy 
stockholdirs, and CM di|)o>it.s of cash. On the hasis 
"f the funds thus i)rM\ided tin hank is ahle to create a 
•n-^^v amount cd' credit which. '\hcn loaned to entrepre- 
I'urs, serves the purpose of actual ca|)ital hecause with 
' they can p";(liase the capiial goods thev re(|uire. 
I redit is a si 'slitute for monev in makin<> e\rlian"es 




and may be comijared to airships which in tlie near 
future may reiuler superfluous raih'oad tracks and right- 

2H.5. Opirdliun.s of (i hanJc. — Tlie Dperations of a 
l)aiik aie tiiree: Discount or loaning, deposit, and issue. 
In diseoiMiting or loaning, the bank buys from the 
customer a m ii-cireulating crc(ht in the form of a prom- 
issory note and ])ays for it with cash or, what is much 
more l're(iuently the case, with its own credit in the form 
of bank notes or a (kjjosit crecht, either of whicli are 
cii-eukiting and can be used as a me<lium of exchange. 

In (kahii''- \\\[]\ the bank the customer niav either 
sell (discount) notes of other peojjle which he has 
taken in trade, or he may sell iiis own note with 
these trade note^ as collateral security, or he ma\ 
sell his own note with or witliout some collateral. 
Wv have now to consider what it is that the bank 
gives in exciiange for the right to demand and 
rec'cive monex' at a future time which is ae'[uircd by it 
under tliesc circumstances. In the case of discount the 
])!()ci'eds of the discounted note (face value less inter- 
est ) are placed to the credit of the customer, to be drawn 
out by him by means of checks to suit his convenienct 
The customer has given the bank the right to demand 
funds IVom him at a definite future time in exchange 
for the light to dtinand I'unds from the bank at any 

The item "indi\i(hial de])osits" in a bank statement 
does not inipl\' that per'^ons ]\nw deposited cash to that 
amount in the bank; some of it of couise represents 
cash de|)ONited. or checks, drafts, itc., deposited for col 
lection which are e(iui\alenl to cash; but the greatest 
proportin;! represinls credits \\hieh have \kv\\ sold by 



the bank in exchan<>- or non-ciiviilatin^ forms of credit, 
i. e., proinissoi-y notes, eoininereial paper, etc. 

A bank note is a form of demand lial)ility sold i)v tbe 
iiank. It is simply the evidence of tlie debt of the ]rdi\k 

the same as an entry in a bank l)ook showing that 
whoever possesses it can claim from the bank a certain 
^ im. The system of checks and deposit is a snlistitnte 
tor bank note issues and developed out of them. Kny- 
md and the T'.iited States are the oidy countries mak- 
ing extt -live ..>e of the system, the contine?ital countries 
still ciingin<r to tlu hank note. 

Ju the oj)erations we iiave been considering the sub- 

(ct matter involved is in everv case t ither money or 

contracts for the payment thereof, vi/., credit. \o 

for I of dealing in mercl'.andise or real pro^jcrty comes 

roperlx within the field of banking. 

28(». Jicspon.sihiliti/ of ilic for proper distrihu- 
lion of nipitdl.- Mr. C'onant says in his "l*rinciples of 
Money and l?aid<ing": 

It is in (li^t^il)^lti^^ between dipositors, borrowers, ami his own 
vaults tlie nioni'V intrusttd to him by depositor.^ in siidi a inan- 
inT tliat hi' sliall !)(■ able to rcp.iy it aecordiiin' to bis promise, 
that tlie most rjilieate and important fnmtiem of tlu- banker 
arises. If ;s in the e\ 'iliini of thi> function that I be modein 
banker ha become the arhitei- of the direction of investment, the 
lU'^ani/ation if industry, and even of the fate of nations. Sim- 
ple as the process i> by whii'h the banke r tran-lVrs to others the 
-lored purchasing power «hich he has itluied up in small de- 
posits from his customers who have aicpiired i^old or tbe right 
'o command gold, it is bis selection among tliese borro-sei's wbicb 
determines the cour-e of tbe industrial progress of the nation. 

lit lu-e it comes tbat Ibe bank(r. in tbe t"nancing of important 
enter})rises, can within certain limits dtterniine «hetb(r a given 
project shall succeed or fail. In e\erv growing commuiuty 









nuu'li of the rial hurdi ii of dccidiiig iij)()ri tlie course of its fuhire 
di'vclopnioiit liis with the liankcr. It is for him to (letcrniiiie 
the relative iiiar<rinal iitihtv of one enterprise as compared with 
aiiotlier and to ^rant liis suj)port to the enterprise wh.ich promises 
the hi<;hest utility and therefore the most certain })rofits. 'J'luis 
there rests upon the hanker in a sense the vital function of trus- 
tee for tlie couHTiiuiity in its dealings with itself. This trustee- 
ship is especially sacred if he deals with the money of others, us is 
usuully the case, and not purely w ith money of his owi . 

The peculiar nature of a l)aiik and the close relation 
existino- hctween It and the economic welfare of the 
community is hrought out clearly when a i'ailure occurs. 
In the case of an enterprise of a more private character 
— a manufacturini^- or mercantile concern--a failure 
does not ordinarily hiino- such disastrous results as the 
I'ailure of a hank, hecause the ])arties injured expected 
to take a lisk and usually have means of protecting 

A haidv failure, on the other hand, throws a direct 
loss on a ^real many i)eopIe who have not calculated 
on any risk, l-'urtheiinorc. tluie is an indirect loss of 
confidence in hanks. This leads people to withdraw 
their deposits and ^o hack to the more |)rimitive and 
expensive melhods of t xclianoe, thus relanlino- the eco- 
noiiiie (kvelopmenl oj' the <'oimtry. 

Our i)rosperity is owino' to a laroe extent to the 
devices which make exchange easier and cheaptr, just 
as hetter railways aful steamships increa;ie our welfare 
hy |)r(/molino' that form of exehanoe. Hankino^ de- 
vices, the use of ejieeks against deposits, etc.. are jiist as 
imi)()rtant as inventions which help to annihilate dis- 

The hanks lia\c so impoitint a role io play in th.e 
disjHisition of the eirenlatino^ capital o!' the ecimtry that 



they can cause a very serious complication when, by 
departing from the true rule of banking and in hope 
of gaining large profits, they invest these circulating 
i'unds in enterprises of a speculative character and by 
so doing convert circulating into fixed capital. 



287. Auahisls of credit. ~ A bank loans its c-redit, as 
a ^reneral rule, rather than cash. Wv shall have to prove 
tills statement, for the averane banker will insist that he 
loans cash. 

Credit IS the promise to pay money at a t'ntnre time 
and arises out of an exehanoe in whieh proj)erty, serv- 
ices, or some valuable thino- is exchanged against a 
promise to pay an e(inivalent value in the future. The 
transaction is not complete until the promise is dis- 
charo-ed. A c^dit is created, therefore, by a transfer 
of value which is ,till incomplete, one of the |)arties as 
yet not havino- pcrCormed his part of the contract; \u 
lieu of property, the second j)arty oives the right to 
receive I'rom him value at some future tinie. Having 
l)een once created, this credit ''."s right to receive value 
— is regarded as piojierty and may be transferred as 
any other form ol' property is transferred. Wiioever 
posstssis the legal right to receive this value may de- 
mand it of the debt* ■ when it is due. 

As a medium of exchange, credit is su))erior to stand- 
ard money in that it does not involve the transfer of 
mtrinsically valuable commodities pi-oduccd at great 
cost. 'I'hf function of the bank is to promote the use of 
this incxpeiisive substitute for standard money credit, 
it does so by atfording a marki-t wherein credits can be 
bought .ind sold. A tyi)ical illustration of tiiis im- 

L' IS 




])()rtiitit service to the business of the community is as 

'2HH. Ilutc credit promotes indnstri/. — The process of 
|iro(luein^r from the raw material a cotton garment he- 
lore it reaches i. i consumer re({uires months of time 
and the i)artici))ation of many separate industries, 
riie raw cotton must he grown from the seed, ginned, 
lialed, transported, carded, s[)nn, woven into cloth, cut 
and sewed into the form of the garment, transported, 
and sold to the johher, then to the wholesaler, to the 
retailer, and tinally to the consumer. Practically every 
step involves an exchange in which a quid pro quo is 
necessary. For example, u cotton-mill owner cannot 
perform his part in the chain or })roduction unless he 
can possess himself of the raw cotton and hold it long 
enough to make it into cloth. If he has no equivalent 
to exchange for the cotton, he is esto{)j)ed from business. 
The owner of the raw cotton, ])erhaps, cannot wait 
sixty or ninety days for his pay atid he cannot, therefore, 
accept the credit of the mill-owner in exchange unless he 
can sell that criMlit for casii. 'J'he credit of tiie mill- 
owner, in the form of a promissory note, is not a 
medium of exchange which the cotton dealer can use to 
[)ay his obligations. The bank, however, stands ready 
to buy that nole and give for it something which can be 
used as a mearis of })ayment. The bank, a market for 
negotiable commercial j)a])er, has made possible the ex- 
change of cotton, and the industry of the country has 
been aided, liecaiise a market for credit exists, ex- 
changes can take place which w(;uld otherwise be im- 

2S0. liciks create credits. — besides furnisliing a 
market lor ci'cdits already in existence, banks engage 
!.n transactions in w hich ciedits are created by receiving 





(Itj)o.sits and niakiii^r loans. In exchange for cash de- 
I)<)site(], the depositor receives the promise of the hank- 
to repay the sum on demand. Tliis is evidenced hy 
an entry in the pass hook of the depositor. The hank 
redeems its ])romise, eitlier partially or entirely, when- 
ever it accepts a check drawn npon it hy the depositor. 

Jn loaning- money, the hank may exchan<^e cash for 
the promise to })ay of the horrower, either on demand 
(a call-loan) or at some stated futnre time (a time- 
loan). This, however, is not the nsnal transaction. 

Ordinarily, when the hank makes a loan it is to a 
re<fular customer who has an account. In this case the 
horrowin^r customer receives, in return for his i)romise 
to pay, a credit on his deposit account against which 
he may draw checks. In this transaction the hank ex- 
exchan^rcs its own promise to pay money on demand for 
the i)romioe of the horrower to j)ay a lar^rer sum at some 
future time or. if it is a call-loan, on demand; the whole 
matter is simply an exchange of credits. It is hecause 
the horrower rarely takes cash from the hank hut prefers 
to acce])t a deposit credit, that the loan and deposit 
items of the hank statement correspond so closely in 
amount. Alost of the deposits of a hank are created in 
this way; the rest arc created hy the deposit of cash or 
eash items. 

Tlie deposit item of a hank is not, therefore, a record 
of the sums of money hrou^iit into -the hank hy cus- 
tomers, although it includes such sums; it represents, 
rather, the (lemand liahiiities of the hank (excepting 
its circulatiii''- notes outstanding)— that is, the sums 
it may he called upon to ])ay at any time. 

Is it not clear, therefore, that what a l)ank loans is 
not cash hut its own credit:' It is a simple matter of 
fact that the honowei' does not take monev when he 



^"■c'ts a loan but takes instead a credit on tlic hooks against 
w hic'li lie can draw cheeks, that is, he accepts the promise 
of the l)ank to pay on demand, whicli is a deposit credit. 
'I'he very fact that a deposit cre(ht is payable on demand 
does not make it any the less a credit. 

2i)(). lifinJi credit pnfcrnhlc to cash. — Why do jier- 
sons bori-ow from the bank unless they need the money!' 
Why are they willitig to pay interest on funds which 
thev leave in the bank^ Whv are thev willinij to take 
the credit of the l)ank instead of eash^ Answers to 
these (|uesti()ns involve a study of the business habits 
of the business community. 

A business man borrows from a bank in order to get 
something with which to make payments; not usually 
immediate payments, but payments falling due from 
time to time within a month or more. The most con- 
venient method of making j^ayments is by means of a 
check drawn against a dej)osit credit at the bank. The 
chances are, however, that it will be some tiuK . perhaps 
several weeks, before the business man who made the 
loan at the bank will have ^iven out checks for the whole 
amount of the loan and in the meantime he may be 
receiving funds which ai'c de{)osite(l in the bank. 
Furthermore, before the loan falls due. he begins to 
accumulate a deposit so that when the loan matiu'es he 
has simply to draw a check in favor of the bank in order 
to cancel the debt. The bank has had the use of the 
funds, for which the customer has been ])aying it in- 
terest, for some days after the loan was made and for 
some days before it is repaid. 

*J'.)1. S}iiftin<^ of hanK' credit icitJiont liquidation. — 
liut there is still a further advantage to the bank. l\i 
the first ])lace, the checks given out by the depositor 
are not presented at once for payment but may go to a 



1.0 ^ 

'•ii 112.8 



■ 40 


IP 2.2 






^ ^pn\ iFn ilVMGE Inc 




distant city and pass throii^di many hands before they 
find their way to the ha?ik. ^)unno- all this time, per- 
haps for a week or two, the l)ank has the use of the 
funds. Kven when the check comes hack to the bank, 
the bank does not ordinarily i'.ave to part with the funds 
represented i)y the check, althou<rh the drawer has 
ordered the baid< to pay to the presenter the amount. 
If the check I'alls into the hands of a customer of tlie 
l>.'H!k. he will take it to the bank and increase liis de- 
posit account instead of askin^r for cash. As a rule 
the check will come into the possession of a person who 
is the customer of another bank and he will increase 
the (lej)osits of that bank. This bank will present the 
check to the bank, which is liable for its payment, for 
payment through the clearing- house. 

^'et even now the debt(»r bank need not part with the 
cash, for on the preceding' day it has received o?i deposit 
from its own customers checks on the bank holding- the 
check against it. They simj)ly cancel off their mutual 
ol)li^ations, |)erhaps i)ayino- a small balance the one to 
the other. .Still the money remains in the bank. In 
fact, the oidy time the l)ank is called upon to redeem 
its demand obli-^ations is when a check is actually |)r<- 
sented at the tclitrs w indow for cash payment or when 
the balances at the clearing'' house are runnin;^- a<4ainst it. 
The bank statement in the followinn- chapter shows 
that demand liabilities (deposits) of the banks are usu- 
ally foiu- limes as \:\y<yv a^ their cash on hand. Kxpe- 
rienre has taught tlieni that a cash riserxc is amply 
suHicient to meet all demands for I'ash pa\ nu iits which 
an- likely t(i apjuai-. Tbicc-fourths of their demand 
liabilities nprestnt the bank's own credit which it is 

. ...... i: I 

.;:;;; :;; ;.v ^ j; ;;;;; -.;;;; i; nri^ ;;;r,iii-.i I in i'i imi it ^^ n iiIMlIlM III \ 

prefers to use checks lallier than cash as ;i medium of 



exchange. This credit of the hank serves all the pur- 
poses of money and the l)ank can get interest for the 
use of it just the same as if it were cash. 

29"2. SimUaritji of checks aiul hank notes. — It is pre- 
cisely the same as if the hank loaned its credit in the 
shape of hank notes. ]k"fore the Civil A\'ar, when there 
was no restriction on the issuing j)ower of hanks, the 
horrower received from the hank its notes, that is, its 
i)romises to pay on demand; to-day the horrower receives 
the promise of the hank to pay, hut in the sha})e of a 
deposit credit which really amounts to exactly the same 
thing. Checks, hased (tn these dej)osit credits, circulate 
as a Hjcdium of exchange, although in a more resti-icted 
way than the old hank notes. Xohody will deny that 
a hank note is simj)ly the promissory note of the hank 
and that the haid-c loaned its credit when it gave hank 
notes to horrowcrs. ^Vhy should ariyhody deny that 
a modern hank loans its credit when it gives to the hor- 
rower a deposit credit:* 

21>a. Limits of cdniiufr poxcer of the hank. — The main 
source of the hank's profit is the interest received on 
loans and discounts, and it follows that the profit varies 
directly with the amount of loans made. What then 
is the limit to the amount of loans a hank can make!' 
The National Hank Act s Is no direct limit e\c(,|)t that 
it forbids any jiational hank to loiui to ;my individual 
or firm an amotuit greati'r than oiu-tiiith of the hank's 
cajjital and surplus. Indirectly, it limits loans Itv pro- 
viding that national hanks shall k(t|) a reserve whieh 
shall not fall below a ecrtjiio jx'reciitagi' nf tin net de- 
posits. When a bank gives a loan it must lithei- j)art 
with that amount of cash, thus reducing its reserve, or 
li must giv«' a (iep<l^lt endit. tjiiis inereasiug its net 
deposits; in either easi' it has inereast d the ratio between 





irsrn-c and net deposits, and the limit to wliioh this 
ratio may hv increased is one to four, whieli is the same 
as savin nr that the reserves must be 2.5 per cent of the 

204. Difference hehceen a cash and credit loan.- - 
When the liank loans aetual cash instead of cre(ht, it 
increases the ratio between reserve and deposits four 
times as mucli as Mheii crecUt is loaned. For exam|)le: 
A bank with deposits of Ji<l, ()()().(>()() and a reserve of 
•$.'}()().()()0 (the ratio between them beinn^ \ ,'.\ ]..'j), |o;,iis 
>f<I ()(),()()(). I f the borrower takes the cash from the bank, 
tlie deposits remain as l)ef<>ie but the reserve has fallen 
from -t'JOO.OOO to S2()().0()(). thus chan^in^r the ratio of 
reserve to deposits to 1 :.5. which means that the reserve 
is (udy 20 per cent of the deposits, and this is below 
the le^al minimum if the bank is a New ^'ork national 
bank. Suppose, on the other hand, that the l)orrower 
accepts a deposit credit instead of deinandin^r cash. 
The deposits then increase to .$1.1()(),()()(), while the 
reserve remains as before at $.'{()(>.()0(), the ratio in this 
case risino- to 1:.'} 2-.'J. When thr borrower took cash, 
the ratio changed from 1 ::i I-.'} [,, i:.5; „|u.,, the i)or- 
rower took credit, the ratio clian^rcl Irom \ ;.\ \-'.\ to 
1:.'J 2-;j. In the first case, the reserve was depleted 
below the leual limit; m the second case, the l.ank could 
still loan another ><1(M).()(M) before it reached the limit. 
There can be no (|uestion as to whether the bank would 
prefer to loan i's cash oi- its credit. 

2i).). Cdsli (I preciotin eoniniodif// af liun.^ It be- 
comes easier now to sec the reason why ,-;,s!) j^ such a 
precious commodity in Wall Stred; not because cash is 
a medium of exchange, for Wall .Street uses very little 
'•'■' •' ••• ;:;iiis;iv iifiw^ iT> biiMiHss, iMit because cash is 
the basis of ciidit uliich /'.v the medium of e.\eh;ui^e. 


Ilfiice the rivalry among the hanks to secure cash de- 
posits, for cash deposits mean hirger reserves, hirger 
reserves mean new cretht created to three times tliat 
■iinount, new credit means hirger loans and conse(juently 
increased dividends. Hence, also, the great disturhance 
caused hy the withdrawal o'' a few millions of cash 
deposits, such as wiien withdrawn hy the country banks 
to "move the croj)s." Withdrawals of cash mean de- 
pleted reserves, which condition creates a shrinkage of 
bank credit and a re(hiction of ])rotit-making loans. 

More than tiiat, the contraction of credit — the me- 
ihum of exchange in 90 per cent of the important 
transactions of the market — has the san e effect as the 
retirement of a large portion of the cii'culating medium. 
The effect of tiie movement of a t\-w million dollars 
westward to move the crops would he an unimportant 
matter if it involved the contraction to that amount 
simply of the medium of exchange; under present con- 
ditions it involves a contraction of three times or more 
of the amount. 

Those great accumulators of cash, the country hanks, 
the savings hanks, trust companies, in\istment coni- 
panios, and insurance comp-nies, ha\{ in their pox^cr 
the control of the money market, for the cash, at Mieir 
disposal forms the basis of a vast stiucture ot' credit 
oil which the business of the tinancial center of the 
country rests. The dangerous element in the situation 
arises from the instability of this foundation, for the 
withdrawal of cash from the i-eser'.es of the banks causes 
the eo!laj)se of the superstructuii . credit. 

In view o|' these facts the rate of interest which the 
>.'ew York banks pay tor cash deposits. I ' ^, per cent 
or •_' per cent, is a small matl( r. l"or i v( rv ddllar of 
casli dej)osited they are enablcl to loan eiidil to Ihice 



times tlic amount at liom 2 [kv cent to 6 per cent, thus 
rnakino- a ^ross j)roHl of from .) per cent to 15 per cent 
on the deposit. 

The word "deposit" is amhiguous and has a dual 
nature. When u batiker asserts that he makes 5 per 
cent ^rross profit on his deposits, he uses the term as 
meanin<4- demand hahihties outstatuhng (excepting, of 
course, circuUitin^r notes) . A deposit of cash in a bank, 
however, rncans somethin^r more than an increase of that 
amount of the demand hahihties of tlie bank; it means 
an increase of reserve to tiiat amount, on the basis of 
which the bank is justified in increasing its demand ha- 
bilities by three times the amount dcposite(h and this it 
usually does if there is a market for the loans. On 
the receipt of a deposit of ^\{H)0 cash, the bank does 
not put .$-J.'50 in the reserve and loan -$7.50; it puts .$1000 
in the reserve (for the reserve is not a special fund, but 
represents practically all the cash on hand at any par- 
ticuli.r time) and increases its loans and demand lia- 
bilities ((iei)()sits) .$.'}00(), if it is a reserve city national 
bank, or more if it is not. (See Section 4()1.) 

2{)r». Prohlcm of the reserve of greatest importnnee.— 
The problem of what constitutes a sufJicient reserve is 
one that en^ra^res the mind of bankers at all times. The 
amount of credit which they can keep afloat and upon 
which their profits depend is determined by the si/e of 
the reserve which they can hold In tiieir vaults. It is 
obvious that if a large proportion of the demand credits 
are presented at atiy one time that the liank cannot meet 
them. This hapj)ens oidy when some event occurs that 
shakes flic conlidence which the dej)ositors have in the 
bank. If tlu- bank cannot dispose of its assets by bor- 
rowino- iiom the other banks, it must fail. In addition 
to this danger there are certain times of year, varying 

DKTOSIJ (I l{Hi;.N( V 


in (iiffcrcnt localities, when hanks ineiease their reserves. 
It may he that more aetnai money is used in liand to 
iiaiul transfers, oi- that the l)anks expect a demand for 
local loans that eanses them to increase their reserves. 
W'heii there is any general movement on the j)art of the 
comitry hanks toward inereasino- their reserves, sneh as 
lakes ))laee every year when the crops stai-t to move, the 
withdrawal of aetnai money fiom the leserve cities 
eanses hank reserves there to fail in voinme. C'on- 
\ersely, when the demand for mon'y in the interior 
>nhsides, the money Hows hack into the reserve eitv 
lianks. and their reser\cs are tlins increased. Hence 
a reserve which is sntlicient at one time of year may not 
l)e at another: and reser\es which aie sntlicient durino 
a i)erio(l when the orantino- of cre<lit is on a normal 
l>asis may he lamentahly insnthcient when there is a 
•ii'neral demand foi- iiijiiidation. 

2!)7. LdcJ,' of CDOjuralion cdiiscs h(ut],s to lose ir- 
serves- [ 'nfortimatcly. nnder onr present system, there 
!s \(ry little cooperation hetween tin- hanks of dilfcrcnt 
cities wlieii demand for licinidation hecoines o-eneral. 
Kaeh hank docs c\ ciythiny in its power at sneh times 
li) increase ils it^erve, and it mnst all he ;it tlu' e\|)ensc 
• if some other hank. The ui'ite. knows personally of 
se\ cral hanks, each of which in<-reased its r( sei-\c diuiiio- 

""' P""i'' <''■ I"<'7 iMitil it amount. (I to ;.> per cent of the 

2!>H. MelJiods (.f 'nicrcash}^- rcscnra.- \[ sneh times 

there are only two ways of increasin«,>- the total of the 

conntry's hank i\ser\es miiii they heni,, |,, |„. increased 

antomatically In the oia.hial li(|nidalion of credit. The 

most coiiiiiion nuthod is to neoot iat. for ..,,ld ;.h.v..= = ! 

This is slow, however, and is apt to he e\|Kiisive. The 

second nielhod is i.v (he dep,>sit ol' (iovernment funds 
\ II- li 


J* — ,— 

.-A-. -I 

M itii tlic hanks. This was of ^yreat assistance during the 
])anie of 11)07, hut it ecnild he taken advanta'^'e of hy 
the holders of certain securities which the (iovernnient 
oirered to aceejjt as colhiteral for the h)an. Since that 
e\|)erience the law has httii clian^ed so tliat the list 
of acceptahle securities has hvci\ ^ivatly enhir^'ed: and 
tl(M-e is IK) douht hut that the new arran^-enu'ut would 
prove of \alue if the expei-ienee should hi' rej)eated. 
This |)resupposes. however, an a\ailahle surj)lus of 
money in the Cnited States Treasury, on the presence 
of w Iiicli it is not safe to rely. 

2!)!). Svc(ni(l(irii reserve. — A ^rreat many haid<s. in ad- 
(htion to their casji reserve, carry wliat is sometimes 
known as a seconihuy i'eser\e. The cash I'cserve means 
money on hand or on deposit in otlier hanks. The 
secondary reserve consists of any secin-itics wliich are 
readily marketahle. Itaiiroad and such municii)al honds 
as are listed on tjie \ew \nvk Stock Kxchan^'c are the 
most poi)ular. hec luse they are l)ou<4ht and sold daily, 
and the hanker may always ascertain their mai'kct \alue 
hy recourse to the daily |)a])er. Thei-e are certain issues 
which are very active on the exchanoe. hence they hest 
ser\ e the liankci's' |)ur])ose. Because of this, many l)ank- 
ers fall into the error o{' thiid-ciny that any hond which 
is listed is readily mai-kctahlc. Theie aic a oreat man\- 
issues, jiowever, wliicii are listed hut for wjiich it mav 
i»e far from easy to find :\ niarki't. It may he that 
the issue is small and not widely known; or it may he 
that the honds are closely held hy a few interests. In 
either case the issue is ni»t active, and the honds will not 
always sell readily. 

The yreat fallacy of the theorv of investment in 
listed honds on the assumption that thi\' are salahje, 
however, is more fundamental. I"',\(n whin a hanlv se- 

DEPOSIT I rui{i;.\( V 


Itcts as a sccntidarv reserve, hoiuls which arc active, it 
iloes not follow that they can he sold when there is a 
ut'iieral (leniaiid for licjuidation. The same issue of 
\nun\s may !)e held hy a thousand hanks over the country 
111 the same theory and it is needless to say that they 
(iiiiiiot all convert them at the same time. If any of 
flicm sell, it will he at a <4-reat sacrifice in price, and 
\vith each sale the price declines still further. 

.•}()(). l^uirliahilit// of Jxind.s as reserves.— li must not 
he supposed from this that investment in listed honds 
IS unwise. In practice they have many times proved 
to l)e a very valuahle asset, hut <renerally for a somewhat 
(litferent reason. First, they are readily marketahle 
I .\ee|)t during i)anics, so that if a hank wishes to realize 
<»n its honds for reasons peculiar to itself it may do so 
without great loss. Furthermore, in the panic of li)()7 
tile city hanks refused to redeem any credits in cash, 
M) that even if honds had hcen sold on the exchange, 
ihe sale would not have ohtair.ed for them any currency. 
I'his action, however, enahled them to make more loans 
than they otherwise could have made, and the honds of 
their coimtry corrcsi)f)ndents were very aeccjjtahlc col- 
lateral. When the countiy hanks saw the market price 
'>f honds falling oft\ they preferred horrowing with 
111* ir honds as collateral to selling. es|)ecially as neither 
■ ilternative netted them any actual cin-rency. 

.■}()1. G(n-crninciif Deposits. — Since 11K)7. Secretaries 
"f the Treasury hnw accepted honds other than govern- 
ment as seein-ity for government funds deposited in the 
iiatif)nal hanks. The adoption of this poliev. which has 
liecii recognized hy Congress as legal, renders various 
' lass's ol' honds .-i \ Mlo.Mhlc a***-^'!^ i" t^inw. />f' n..i.;,. 


■ I 

; I 


HANK. S'I'A TK.Ml.N r Hl.SOl H( I,S 


1 ' f 

'M)2. ('otnhiuc'd sidtcnn lit. In passing- iVoiii the tlir- 
oretic'cil to Aw ])i'a('ti('al (lisciission ol' hanking', it is will 
i'or the student to heeonie t'aiuihar with tlie hank state- 
ment. It is a siininiin^' np of all the transaetions oi' the 
hank — a eondensed reeoi'd ol' all the hooks of account - 
and every transaction, no matter how small. ])i-o(luees a 
change in the statement. An understanding-, therefore, 
of all the items of the l)ank statement will provide a 
^•()()d introduction to the actual pi-aetice of tlie husiness. 

The statement reproduced in section tiOli on pai^e 'Jdl 
is the eomhined statement of all the national hanks in the 
country. The federal law provides that each national 
hank shall make a repoi't to the com))troller of the cur- 
rency at least five times each year. The dates for niak- 
iniT the reports are not fixed hut are announced hv the 
eomptrollei- at intervals. It is a peculiai'ity of the hank- 
in^' l)usiness that it may have a com|)lete re])()rt of its 
financial condition at the end of each day. In a mei-can- 
tile or manufacturinii' estahlishment it is ])ossil)le to ha\e 
such a statement only aftei- an in\entory of the stock <mi 
hand is taken. The assets oi' a hank are of such a nature 
that tlic perpetual in\entory can he kept. 

It was th()U<,dit hest to take tlie i-ejjoi't oi' all the 
national hanks rather than a statenu-nt oi' any sinolf 
liank; the items are exactly the same and th" relation 
hetween the different amounts is more ty})ieal of the 
avcratje hank than anv single statement could l)e. 


HANK >r.\ 1 i.Mi.N r i{ix)ri{( i:s 


;{(>.'{. Proof of lilt' ticjiti.sif (■Nrniic// llicor//. I'lirtlicr- 
iiioii'. the fiuiii'ts sliowiiiL'' tii(.' fclatioii lictwccii loans, 
deposits and i-cscrvcs. arc the best proof thai can l>c 
(■ffci-cd as to the vahchty of tlic (k'])osit-can'reiic\- theory 
presented in the preeechnu' chapter. It will l)e observed 
that tlie total voliiiiic of loans and (hscounls in the 7 ^■-<) 
naliona! hanks in 11»]2 was hnt little in excess of six 
iiillion of dollars. The in(li\ idual deposits, oi- the 
.iinount due to depositoi's of all sorts exc-ept l)anks. was 
a little less than six hillion dollars. The amount of rc- 
■''■rxe. inchidin<4' the specie and le^al tender notes and .> 
per c-ent rcdcnij)tion fund, amounted to nine hundred 
million dollars, oi- 1.) per cent of the deposit liahility. 
Since the total amount of money of all descriptions in 
iliis country was then ahout S:}.4()0.()0().0()(). and since 
'he (le])()sits in the state hanks and tiaist companies, com- 
tiined w ith the figures iii\ (.'ii. would ha\e made a total of 
M\t'i- Hfteeii hillion dollai's. it re(piires no argument to 
>how that the item '■(lc|)()sits" does not represent cash 
iKposited hut rathei' credit extended hy the hank. 
I'herc is not enough actual cash in the whole world to 
pay the de|)osit()rs of the l)anks of the United States if 
they should suddenly desire to exercise their le<>al right 
and all at once call for payment of their deposits. 

o\ii!iNi:i) m.i'oKis i{i:(^iii;i:i) n\ riii-: ( of 
I'nr: c riiifi'.Nc v i hom riir. \\rioN\i. hwks 


15 \\K SI \ii-.Mi;\ r. 

'iAJi> HANKS. SOMMIUH -'ti. 1 '-* 1 .'. 

1. 1.11,111'- .'111(1 (lis(i)unt-- (III uliich iirticcr*. .iiid (lircctur-; Mr">lc, cither as |i,iycr"i or indiirscr^. 
Feins and di iDiints (in wliicli (itticci's and dirccturs an- 

iiot lialilc as payers or iiidorsci-, .'S l),().)^*.;w.^().'9.KJ 

J. Ovcniratts, sfciircd," ,$ — , imsccun-d. s— — ,'(i.K):i,(l()F.H 

;i. r. S. lidiids to secure eireidatioii, jiar value T.N.IS.'.SHI.OO 

k L'. S. boiiils to >eeurf L". S. liejxisits. pur value 4i),ll).j,lO(l.UU 

2fi'~ Mn\]:\ AM) !{.\\Ki\(; 

■"'• <'tliir ImiihK Id s(ciiiT I . S. .Ir|ii,^its <{:(:{()") 1') I '-, 

<i. r, S. ImiikI. on ImihI ;..,. " ;,";:V;.'oii().on 

«. I rciiliillils nil I. S, liniiiN ;,o:>!l.-i.-,|.S| 

S. HoikIs, .s.ciiritics. etc l.(i:i(i!fM .'!l)(il.:t(i 

H. IViiiking lioiisf. fiiriiitiiic ^iiul IIsIuits .'l,<,;!li>,SI)i)..>s 

IC. Other real estate owned -'!)!()7rtj).")0. '1 

II. Due froiii liaiiks (mil rcMr%e .ip'iiN) 177 JHllvLMi", 

I-. Due from stale hanks and iMiikcrs -'ls].>S!),;!:>S. V, 

l:i. Due Iroin approved reserve aiiciils 7H(i.l!)i».si).i..'l. 

II. Clueks and otiier cisli items.'. :il.'lllo!.">fi7!u 

I). i;xeliaiij.'es for elearin^:- lioii^e J7S,(i7_>,(i|i).;,;{ 

III. Mills of other national h.aiiks KU |s[j:{Ml() 

17. (-'raetional eiirreiuy. nickels and cents :{.;{0(),:{i)0.i)7 

IS. Specie (IS.'.:iJo]7JI.71 

li). I.egal-tender iio'es 17(i.7 7(S,01(i.O() 

-'0. live per cent redemption fund S.>,|S(f,.'7:JX) 

-'1. Due from Treasunr liiited States 7,.5H:U(i()!.H 

'f "'"1 .1)10,9(i,i,788,()17.()8 


-'-'. ra|)ital stock paid in s l,i)t,-,.ll!).V-,s(l.()l) 

-'•*• Surphis fund 'loi.'Kifl.s:},!.;,:! 

-'4. Tnilivided |)rotits. less expense^ am! taxes -'fls.o<)7,.>,V,. | |, 

-'."). N'ation.d h.iiik notes outsLindinj. I JI,.)(IJ,I S.",..j() 

J(j. State hank notes oiitstaiidiiii: .'7,7(»l.(»() 

.'7. Due to other national hanks 1.0.j(l,l!)!»,i):i,>.!n 

J^. Due to state hanks and h.inkers U.MHS.Hd.SI 

■-'!•. Due to trust companies and sa\in;:s hanks lli,».:ins,!i:i7,S| 

'.iO. Due to approved reserve ajreiits l:{.7!l!),:i(lt,(i:{ 

SI. Dividends unpaid 1,0:{,>.7,'{S.(;;! 

;i-'. Individual deitosits siihject to checks. | 
M:(. Demand certificates of deposit. I 

;U. 'lime ccrtilicates of deposit { J,9H..J()l.U(iiJ,91 

S5. C'ertifieij checks. I 

;?f>. Cashier's checks oiitstaiidiii;.'-. J 

.'57. I'nited .States deposits S:},.)!)t,l 1:{..'J 

.'is. I'ostal savinjrs (le|)osits l.j,()l:>,:n.").S7 

:i!l. Deposits of I'nited States dishiirsin^f otlicers I -.(if)J.K'< -M 

■UK HoikK l.orrovved .'!S.77 l,(iSS.7H 

41. .Votes ,111(1 hills redisi'omited 10.77(i,J7. '.,)<) 

4.'. Bills pa_\ ahle (iLKr).-.'!!.).,-,,-, 

■i'.i. I{eserv<'(l for taxes 7.U7.!t7.j.Hl 

44. I.iahilities oilier than those ahove stated l,71(>.;i<)7.s:{ 

Total .>>!10,9(J.i,7HS,iil7.t)^ 

.*J04. Ddiihlr-ciilr// .si/slo/i. - Tlic fi''st tliin^' to he 
noted about the >,tati!iKiit on tliis panv is lliat ihv t^ o 
coluniD.s of resources and liabilities exactly balance eacli 
otiier to the cent. The reason of tliis is to be round in 
the system of double-entry bookkeeping- by which everv 
traiLsaction is recorded twice, so that it is iiii])ossible to 



alter the cirdit or resource s'ul: without at the same tiine 
(•lian'4'iii^ the hahihtx oi- dthit side, lender this system 
the hank is considered as havin<^ ro projjcrty ol' its own, 
liiit that all its resources ahove its liahuities belong'- to 
tlif stockholders, and these resources are classified as 
part ol' the liahilities under the items cajjital stock, sur- 
plus funds, dividends, profits, aiul dividends un})aid. 
Tlicse items are liahilities of the hank only in the event 
of li(juidation. 

The fact that the resources and liahilities of the hank 
are ecjual has no hearin*)- whatever on its solvency. 'I'lie 
last statement ^yiven out before a bank fails inrariably 
shows the resouives to he ccjual to the liabilities. 'I'he 
tliserepancy must be looked for in some of the Items: 
either the resources have been put in at valuations above 
their real worth, or some item of liability has been 
omitted or reduced. ]t is almost always discovered in 
the event of a failure that loans and discounts contain 
items which are far less than the figures set down. 
( nder resources are put down all the items of property 
owned by the bank and all sums due to be paid to it 
in tlie future. I 'nder liabilities are placed all the debts 
owing by the bank and all items representing- the e(iuity 
of the stockholders in the property of the bank. In 
other words, the liability side of the statement simj)ly 
indicates to whom the resoui'ces bel(jn<4' in case the bus- 
iness of the i)ank were to be settled up instantly. 

.30.5. AlfiTdfidiis in xtiliic of rc.s-oiirci's.—'Vht' items on 
the resource side may increase or diminish without any 
tiansactions ha\ini); taken })lace and therefore without 
any chanues iiaving been made in the liability side. 
■**^ome of the Jouu-S mu\' ni'o^c to be bad an.d n.on-col- 
lectible, or some of the real estate or bonds may increase 
in market value; profits may be made or losses may be 



.MONKV AM) 1}.\\KI.\(; 



iiicui-rrd. It is iinpossihlc coiistaiitly to adjust tlic 
valiifs «4i\fii ill the statciiiciit to cori-'spoiid lo tiie real 
conditions. Ill sonic hanks the ad.jiistimnt is made 
liiriodicaily : in otlkrs only when it is discovcifd that 
th' ahcratioii of \ahif is jitrmantiit ; and in still others 
it is n(\c r made. 

.'}()(!. ("oiuralcd asscls.- It (V((|iienily liai)])ens that 
where tlie ii( itis of proj.erty ha\e eiihaiieed in value the 
fi«4-ures on tlu' slateuu nt ai-e allowed to reniain ahsurdiv 
low. creatino- what i> ealled ■(•oneealed assets." It is 
C'onsidirerl !)y a ureat many hankers an e\i(i(.nee of 
conser\atism to '•ontinne to list :it a low fi<iui-( , projjerty 
\\orth mueii moi( than its hook value. TIk fe ean he no 
ohjeetioi, tr) ijiis piaeuee so |oni>' as e\-eryl)ody under- 
stands the iT.d eondition and knows that t!ie statement 
is a fictitious one TJie ohjeetidn '() the praetiee I'omes 
I'rom the fact that ( wii the stockholders do not reali/.e 
H'.e full \alue of lh< ir stock and may ht induced to part 
>vi1li it at a prict' which thiy would not consider at all 
if they kiirw Ilice(|uily repriscnted h\- it. 

We shall iiosv tak( u|) (at-h ili m sepaiati I. wiih such 
t'X])!aMation-> as r-n necessary to descrihe the transac- 
tions hy w hi( !i it i^ creaied. 

;i07. Ijxniy. mi/l ilisrninits. 'I'his item of assets is in 
the tiiini of pioniiss()i\ nolf s nf iiidi\idua!s or corpora- 
tions. 'I'll!' discount i(pi( stilts iiot(-, which ha\f hecn 
|»urclias»<l or d!sc"UMt( d h\ i\\r liank at a certain p-ncc 
ImIow tli( Ir face \aluc ai maturity. TIk diircj-cncc hc- 
'^^'■•■n !h( •>, 'due ;it maiiiiily and tin price paid is called 
discount, and i.-. at onct credited to the prolit account, 
Mppearinu" under "lial)il!tics"" in llic item 'undixidcd 
pistils. ■ Loans.' I( clinically spiakiiiL'. rtprcMnts the 
sUlii jiiini wiii i(|ii.'ii ii ihc ia(( u; ijir iioie; ai maiuiiiv 
the hank will receive that amniinl plus the inli n st. The 

HANK >r.\'i'i:.\ii:.N r lii.soruc i:s 


i\\{Yvrv\K'v hctwccn loans and discouiits, thfix't'orc. is that 
ill tile case of loans the l)ank does not reahze its j)rolit 
until tlie note is (hie: in the ease of (hseoiints the bank 
lakes its profit when the transaction is made. 

Diseoiintin^H" has always been considered the jieeidiar 
iiiisiness of a liank. In I'eiinsyhania the trust coin- 
jKinies are not einpouered to discount, but tliey ha\ e the 
riyht to loan money and to purchase notes and other 
iilili^ations. The prohibition of discount does not i)re- 
\ent the trust com])anies from (l()in<4' a general banking' 
liusiness; instead of discounting they simply purchase 
the notes outi'ight or loan the funds on the security 
of the notes, taking the interest at maturity. 

On the back of the bank report are |)rinte(l certain 
schedules which must be tilled out in order to show moie 
ill detail fbi' meaning of the \ari()us items. The law 
proxides "all debts due to an association, on which 
interest is jiast due. and unpaid, for the jieriod of six 
months, unless the same ai'e wi'll secured, and in proci'ss 
of eoilcction. shall be considered Iiad debts within the 
nieaning of this section."' 

All such notes must be listed in the schedule, together 
with all notes which ari' ovtrdue and all notes re|)re- 
senting liability of directors as borrowers. While there 
IS no law limiting the right of the bank to loan to its 
directors on the same terms as to any oilier |)(rson. it is 
rceogni/.ed that the prixilege is likely to be aliiisrd and 
liciiee the banks ait- asked to make a s<parate state iiieiit 
if such loans. 

'M)H. Ovrrdrafls. — Where banking is not conducted 
on the strictest business j)rineiples tlii' depositors arc 
likclv to overdraw their accounts. I'nder certain 

mditions of business overdrafts arc iinax <»i(lal)lc 

the good banker can usually arrange w itii the di posilor 





to ^/\\v a note to tlie hank I'or the amount and con- 
vt-rt the ovenh-al't int.. a loan or (hseonnt. li' a certain 
inaxiinuni teinporarv civcht is wanted to (h-a\v a^-ainst. 
a demand note should he nivcn to the t,ank, the amount 
pa.s-sed to the customer's emht. and when settleiuent is 
made the customer shonhl he charged with 'die interest 
on the amount cliecked out. 

.'J0!». VnUid Stales Ixtiu/.s to srcinr circulation. — This 
item rei)resents honds owned hy the hank hut deposited 
in Wasliinoton. Prior to 1013 the law reciuircd the hank 
to deposit or to own Tnited States honds up to 2.) per 
cent of its capital whether circulation is taken (uit on 
them or not. The value of the honds is given at par 
and not at market value. 

.'JIO. United States hoiu/.s to .secure I'nited Stales de- 
//o.v/V.v.— The law provides that the fu.ids of the I'nited 
States not re(|uired hy the Treasury may he deposited in 
national hanks if I'nited States honds. or under certain 
c-n-enmstances other honds approved hy the secretary of 
the treasury, ari' dejxisitrd in Wasliinoton as collateral. 
The secretary may use his discretion as to whether other 
than (ioxcrnment honds shall he accepted at all and 

what hondsmayheacccptcda.scollateral security. (Funds 
may now lie deposited with federal reserve l»anks.) 

.■ni. I'nited States bonds on hand. Sometimes tli.' 
haidvs hold (;o\ernment honds in tluir (,wn \aiilts witli- 
oiil usino tluni io s.rnre circulation. It is not likeK 
that any hank would hold (iovcrnment ix.nds as an in- 
\estmetit. and it is likely that this item icpivsrnts honds 
which it is (Ap.cted will I,,, sold to eus!oni( Is of the hank 
or will he !C(|iiir(il later for .secni'inn' circulation. 

.'{!•_'. I'reniiunis on United States honds. 'I'hls item 

>•,.! .I-... ..i.t . 1 1... .1 : If 1 I .1 

""' '''" '•■' •:;::;:;;;;;■ ;;;;\\;(n rin jno- \aiuc and 

HANK s'l'A ri:Mi:N r rksotkc i:s 


markt'l \;iiiR' of tlif I'nitcd States hoiids owned by the 

.'{l.'J. lioitds. securities, etc. — This item embraces be- 
>mI(s bonds, also stocks. eIiattel-moi't<>'a<4es, jud^'- 
iii( nis. ehiims, elc.. owned by the bank. 'I'be securities 
which are deposited by l)orrowci's as coihitei'a! seciUMtv 
iMi- loans do not appiar in the statement because thev 
:irr not the |)roi)erty ol' the l)ank until del'aidt has been 
iii:i(k' Oil the note. I'nder the law national banks are 
iKit allowed to own coi'Doraticfii stocks unless it is neces- 
•>a!y to take them in the collection of a debt. This item, 
ilui'cl'oi'c, I'cprcscnts practically the bonds owned bv the 
liaiiks. It has increasc'd ^-i-c-atly within the past Tew 
\iars. because many of the banks ai'e dealers in bonds 
iiid hold them pending' tlkir sale to customci-s. and fur- 
tliermoi-e because the ready mai'ket which is at hand un- 
il' r normal conditions for the bonds causes he bank to 
i'^iard tlu'm as a form of secondary rescrxc which can 
ahiiost immediately be conxcrtcd into money in ease of 
I iiicr^'cncy. 

.'Hi. li<i)ihiii<i- Jioiise furniture <(itd fLvtures. 'I'he 
'omptroller has been rather strict in iutcrpi'ctin^' the 
law with nferi-nce to the holdings of real estate bv 
hanks. The lar^^i' otlicc building's which lia\e bein 
I iccted to house the banks as well as to accommodate 
hundicds of tenants lia\c b'.'cn (.rected by sej)ai'ate com- 
jianics. usually composrd of the same stockholders as 
!lii' bank. 

.'{1"). Other real estate Iniidiniis. This item includes 

.ot only leal estate but ,'!l mortifa^'es and as-.tis rt p- 

i'srntin<^' real estate. The law is \ery strict in limitinj^ 

h( power of thf l>ank to hold I'eal cstutt, as indicated 

;i the follow inu- pro\ ision : 


MOM N \\l) i?\\KIN(. 



A IMtloiial l);inki!ii;' ;i Inn iii,i v [ill I'd i;i m-. hold, .•(iid coiix, \ 
ival ("-tatr for tin t'(illn\\ iii;^ |iiir|i(i-M -, ,iii(i i'uv no dtln i- : 

I'liNt. Such a> >hall hr iuciN>ai'v Cor it- iiiiiin'(hair acroiiuiKjii.i- 
ti(Mi :ii the ti'an-actio.'i of it- i)ii>iiu'>s. 

Second. Such a- -.hall he inort^^ai^rd to It in i;()iid I'allli h\ u .\ 
of si'cuiit V f'oi' (Kill- [)i\\iou-l\- coidract((l. 

Third. Such a> -hall he coii\. \ , c! to it in >at is fact ion (d" d. hi - 
j)l'c\loU>lv coiltractrd in the course (d' iU di alili^-. 

I'ourth. Sucii a> it NJiall |iurcha-r at -air, under iudi^iii'ii'-. 
decrees, or inortoaM-s held h_v the association, or shall [lUrchaM- 
to secure dehts due to It. 

But no such association shall hold the possesion of aiiv real 
estate under inort^aoi . or the title and possrs^lon ,if anv nal 
estate pui'chased to sicun anv debts due lo it, for a longer period 
t h.w! Ii\ e \ears. 

'I'lir ohpi't of tills ])r()visi()?) is to ])rev('nt the baiik^ 
I'roiii inx tstiiio- tin ir resources in t'oi-iiis wliieli are iioi 
feadily eoii\ crtihlf into current I'luids. In roi'inci' 
years, before tliei'c was so iiiucli |)ro|)(.i'ly otliei- than real 
estate which coiihl he iisid as security I'oi' loans, the 
h.inks wert' ahtiost forced to take tiiort oam's oi- noth.iii" 
at all. In times (d' si riiio( ncy wht ti (Kpositoi's were de- 
inanchno' easli. Ilic h;inks were frecpicnlly eniharrassed 
and foi'ced into insol\enc\ hecausc thc\ could not con- 
\ t I't real t^late. which undir such eircunistanccs is 
always \try urisalahh cxccp} at a IrenRiidous sat'rilic(. 
into funds which would satisfy lluii' dcpositoi's. 

liW). Dili' fnni: iKilidntil IxiiiL's. Tllis re])i( scnis de- 
posits in other hanks which niay iinl he counlid 
as pari of the n sri\e. 

.'JIT. liin frnin a/i/)r(f.((I lu srr: ( iKhiits. Prior lo 
191.'}. the country nall(Uial hanks niioht d( posit in 111' 

1 1 ~)i I \ t (iiu-<. iinii-Mi(iis oi I I.I iici rem (ii iinii 



|( posits i-c(niirc(] as ix'stTxc. In \hc reserve cities iia- 
lidiial l)aiiks lui^lit dejjosit oiie-iiall' of the 2.j \)ijr cent 
nijiiired in ceiiti-ai resei'x e cities. 

.'{18. ChccLs find other cash iUiiis — (WcJi/ai.i^cs far 
li't cltariu;^- house. — I'luler these hea(hii<is are iiichuled 
i\(rythiML;' which may he imnie(hately coinertihle into 
<Msh. In cities wliere there is a cleai'inu' lionse the 
(lucks on the cka,-in«i' honse l)anks are listed separately. 

In the slalenieiil we see that the exi-lian^es for the 
ilcarin*^' honse ai'c o\er se\en tinies as ^reat as the 
iliicks and other cash items. Tliis shows the j)rop()r- 
tion {)[' checks, etc.. whii-li can he coUected ine,\pensi\ely 
ind also the j)i'oi)orti()n whicli mnst he collected by 

.*}19. li'tlls of other ixitioiuil Jxnihs. The national 
lianks are not allowi'd to connt other national hank notes 
;is pai't of their riser\c. It is theiefore to their interest 
I'* have as \'c\\ of them on hand as possihle. 'i'o ac- 
tiiniplish this they pay them ont hefoir anv other form 
III' cni'i'ency. or send them to W'ashinoton to replenish 
Mie .") per cent I'l'demption fund or to make other pay- 
iiicnts to tlu' 'i'i-e;!snry. 

I 'ndei' the diirciiiit items i'( present in;j, specie it will 
'le noted that the <;()ld and sihii- cei'titicates are in- 

.'{•JO. /w'i'v// tender notes. This re))resents the LTrccn- 
liacks held Iiy tlie hanks and also the Treasurv notes of 
IS',>(», which are no^^ \(rv rai'c. 

.'{•_'!. lit dim jitioii fund. I'',\ery national hank is w- 

'|iiir(d !o ki t p on dt posit \\ilh iiie Treasurv of the 

I 'niti'd Slates ;i I und i (jiial to ."> per ei nt of its outstand- 

MiU' circnlation. Prior to IIM.'J ties dejjosit could be 

iinnt((l as part of the banks re(|un(il reserve against 




(Icpusits, and so worked no hard.sliip. The l-'cdcral I{( 
MT\ f Act resdi.ded this pcnnission, hut tlic total vlsvvw 
ix<|Mircd to he licld aoainst deposits was h.wcml hy 
much more than the amount of the .> per cent fund. 

.TJ2. Due from the Viiital States V'/vv/.s/zr//.— This 
Item inchides any amounts (hie i'roni tlie Treasi'iry other 
than the .-> per cent funch such as sums of leoal'tender 
money <leposited with the Treasury for the retirement 
oi hank notes or honds forwarded to it for redemption. 



.'{•J.'J. Cupiidl sfoch jxiid in.- The capital stock of a 
I '.ink rc])rcscnts the fimds paid in by the stockholders. 
I lie National Hank i\ct i)rovides that no i)ank shall 
lie^rin to do husiness nntil .)() ])er cent of the capital has 
iieeii jniid m cash, and the balance must be paid iu 
liistallnients of at least 10 per cent jier month. 

The capital is the mar<rin paid uj) by the stockholders 
\n protect the creditors in case of any shrinkage in the 
resources. The law rc(|uires ?io stated percentage of 
capital proportionate to the size of the bank, but aims 
In pi'event un(ler-caj)itali/ation as follows: 

Sec. .")l;5S MS ;iiiu!ul((l l)v ;i(( of Marcli 1 1-. 1 !)()()). Xo ;is- 
-o. iitioii ^liall he ()C^r;mi/( (I witli a lr>s ia|iltal than SIOO.OOO. 
ixri'pt iliat hank- with a capital of not li>s than S5().()()() niav. 
"ith thf sanctioii of the Si'iTitary of tlio Trcasurv be orcrjinizcd 
inv place the population of whicli dors not cNcccd six tliou- 
nihaliitanl-. and except that hank- with a capital ot' not 
'' >- than $','.■).()('() ntav. uith the sanction ot' the Secretai-v of the 
Treasiirv. he or-^ani/ed In anv place the popidation of uhich 
does not exceed three thousand inhabitants. No association >hall 
he nrfraiii/t d in a citv the population of whicli rxcrrds (iftv 
Ihousfiiid ])eisons «ith a c,ij)it,il (d' lev- than S'.'OO, ()()().' 

M a I 
ind n 

By this rcipiiriinent of a certain niaMmnm capital 
tor banks in towns of moi-e than a i'(-rtain population 
the act prohibits tlie establishment of banks with insuf- 

' \,iliiiii;il U.iiik \(l, p. T. 



ficicnt capital in cities where the loans and deposits are 
hkcly to he hiri^c. ('ntil l*)i)0 the niiniiiiuin capital for 
a national hank was; since that time it has l)cen 
J^2.). ()()() to encourage the estahlislinicnt of nat 
hanks in small towns. 


Soc. r)!;}}). Tlie cajjital stock of cacli ;L-snriatIoii <iliall 1 

)r (11 

\m1('(I into ^liar(- of SICO 
crtv. and t ran-f(ral)lr 

each, and he dccnii'd personal proj 

till' hooks of tl 

ic association in ■>\i(li 

niatmrr as niav hi- prc-cnlxd ni the hv-Iaw-. or arti 

('lis of asso- 

ciation. I'.vcrv [)( rxin l)cconiino; a sJiareiioicK r liv sucli traiistVr 
sh;ill. in proportion to his shares, succeed to all the rin-hts and lia 
hiiities of the prior holder of such shares.' 

:i'2i. Double liahilif// of slochholdcrs. — The sliares of 
sto(>k in a I)ank differ from stock in othei- corporations 
in the douhle liahility feature. The piinciple of limited 
liahility is an almost unixcrsal feature of corporation 
laws in this country and the stockholders cannot I)e made 
liahle foi' further payments for the stock if it has heen 
i ully paid. The idea of limited liahility is of course to 
make it j)ossil)le for pei'sons wjio are unwillino' to take 
uidimited i-isk in l)ecomin<4' partners in an entei-prisc to 
hecoine stockholders with a maximum risk of 1 
wfdy what they have j)aid in. In the case of hank^ 
howc\(r. it has l)i('ome a tixed custom not oidv in th 


national hank act hut also in most of the state statutes 
to jjlacc a doid)le liahility on the shareholders for the 
hettcr protection of depositors; the j-eason hein^r that 
the de|)ositoi's are creditors of an entirely difVerent sort 
from the creditors of other corporations. 

Sec. .51.")1. The sh 

iar( liol(l( rs ot (Mry national hankm"- asso- 
ciation shall he held individual' \ responsililc e(|uallv and ratably. 

mil not t'or one another, (or 

1 Nation. il li.uik Act. 



s, .iriil enjja 


liANiv M.\ii;\ii,Nr i,i.\iui.n"n:s 


s arc 

1 f 



)r (li 





■s ot 
ic- to 

e to 












its of ^ucli a>>()ciat ion lo tlic r\tcnl of t! 

oiiiit of tlifir 

■k tlnrriiu ;it the |i,'n- '. iliU' tlicridt . in .uidition to tlic amount 
1 >har(>. (Xi-rpt that >liai-('liol(lri'- of anv hank- 

ii\i>tr(l 111 -ucli >l 
111^ association now (\i>lin<;- iindrr 


V laws havinif not k'ss 


111 !^r).()()().()()() of capital actuailv paid in and a sui-plii> of ^0 

))( !■ cciituin on hand. l)otli to In dctci-niiiii (i hv the ( 'oinptrol! 


the ( 

iirrcncw s|i,i|| 1,,. hahir onlv t( 

amount invested in 

I III I r shares ; a 

nd such siirphis of '10 per centum shall lie kept 

leihmmished. aiui hi' in ad(h'ti()n to the surplus provided t' 

lor ill 

'ills title; and if at an\ time theri' is a deficieiicv in such surplus 

if '>{) 

centum siich association shall not 

pay any (lUKleiul 

ciencv Is made i;ood ; and in i-a» 

ti> its shareholders until the deti 

i)f such deficiency the ( "omptrollei- of the Currency mav compel 

sociation t 

ition to close its 

its hu-iiKss and wind up its aff 
tie provisions of chajilcr four of this title.' 

urs uiulor 

.'J2.). SuvjiJus fiind. This itciii sioiiiHcs that a cci-' 
ain ])()rti()n of the resoiii'ces in adchtiori to the capital 


id in l)eloiius to the stoekhohlers. 'I'lie siirjjhis is 

■ reated eithei' l)y cash paid in at the or,oani/atioii of 
ne hank in ad(h'tion to tlie capital |)ai(l. for which no 

stock is issned. or it i-eprescnts profits which ha\e ac- 
'iiMHihited and wiiich liave not hten paid out in (h\ i- 

The idea of tlie surplus I'und is to provide an item 
ill the liahik'rics which can he used to I'cprcsent chan<>es 
111 the c(piity of the stoekhohlers in the rest fves without 
altering the capital stock. If the I»ank should suil'er 
a loss of resources in any inanner heyond the amount 

■ A' undivided pi(dils. thr capital of the Iiank would lie 
ipaired if it were not for the surplus. 

A surplus is i'e(]uired hy law under the following 
ction : 


\(itii>iial WiwU Act. 

.T. 1 



Sec. .")!!)!). Tlir (liiTclor^ of ,iii\ .o^oci.ition mav scini-aii- 
iiuallv (Irclarc a ilisid.'iid rf so miicli of the lu t profits of tlic as 
sociatioii as tliiy shall i'\|)<'(liciit : l)iit cacli association 
sliall. Ixtorc the dccla rat ion of a dividiiid. can-v one tenth pail 
of its net jirotits of the prcrcdinir half ycai- to its surplus fund 
untd the same shall auuniiit to ^H) ]nv centum of its capital 

.A liluTJiI surplus ciiliancrs the credit of Ww hank 
and for that reason new hanks l'rc'(inciitl\- start wi'h a 
surphis of .50 or 100 per cent of the capital snhscrihed. 
Tliis proves an advantaof in se\eral ways. The hanks 
are re(inired to puri-hase fewer honds than they would 
if the whole investment had heen put into the capital. 
l\\ states where the shari's of the hank ai-e taxed on 
their [lar vahie it reduces the personal property tux of 
the liolders thereof. 

On the other hand the smaller auiount of capitaliza- 
tioiv reduces the i)o\\er (d' the hank to issue circulatinu- 
notes and until the recent aniendiiient to the law I'or- 
hiddino- the hanks to loan more than 10 per cent of their 
c.'.pital and sur])!us to any one person, the' hanks were 
jcslricted to 10 per cent e)f theii- capital alone. 

The faed that the shares of stock represent the e'(piit\- 
of the holders not only in the- ca])ital hut also in the 
sur])lus oi\(.s the ])ar- value of hank stock nnieh less 
meanino- than the "he)ok value." The l)()e)k value (d 
the haid< stock re])resents the -$100 par \alue plus the 
])ro]iortionate share of the surplus. 

The whole ])urpose' of i"e(|uirino' a certain capital sum 
to he eonlrihuted hy tlie' shareholdei's can !)e defeated 
hy the' suhseiiue'nt w ithdi'aw al ed' its fimds as loans to 
.shareholelers. It has fre'(juently happe'tied that hanks 
have heen started \\ilh e-apital horrowed i)\- the inee)r- 

XatioiKil ]\:n;'.. \<\. ]i. JH. 

iJANK s'i'.\ri;.Mi;.\r MAHii.riii:s 07-, 

porators, wlnCIi horrow inos liavc hecii repaid just as 
sium as the hank was in position to make h)ans to the 

Ill the statement (pa^^es 201 -2) tlu- eapital stock of 
;ill the national hanks amounts to a httle more than one 
I'ilhon (lolhirs. or to ahout one-sixth of the deposits. 
This means tliat there niiyht he a slu'inkaiie oC at least 
!'•' per cent in the assets of the l)anks het'ore the de- 
!l||^ito!s wouhl l)e in (hmacr. 

:i'2(\. riuJhidcd ym^//7.v. Tnh'ke tlie majority of 
iManui'aeturino- l»usinesses the profits of a hank are ear- 
111(1 to the profit and loss aeeount as they aeerue eaeh 
'l.iy. From the profits must i)e dethjeted all the 
' Ajx-nses of doin.y- the husiness. At the end of the fiscal 
\«ar the directors nuet and declare dividends from this 
item, the effect of which is to transfer a part of it to 
the account of divide^ uijjaid and the halance t(» the 
sui|)his. Sometimes I dividends when pavahle are 
placed directly to the accounts of the shareholders when 
they hapj)en to he depositors as well. 

•'{27. XatioiKil hfiiil,' notes outsli, Unci. — This item 
rrpresents the amount of notes for which the hank is 
^iill liahle. All the notes which the comptroller has 
! M-warded to the hank are charoed a^i-ainst it until he 
lias received the notes hack a,««ain or has received lawful 
money for their redemption. If the Dank has any of 
'iicsi' notes o;i hand they will he deducted. 

it will he noted that the amount of national hank 
notes oulstandin,L>- almost eipials the amount of Cnited 
Slates honds deposited in the Treasurv to secure circu- 
■ I'lnn. At the particular time this report was made 
lie l)anks were puttino; out as much eireulation as nos- 
-ihle on their hond (le])osits on .aeeount of the very liio'h 
nite of interest at which thev could loan the funds. 


.M()M:^ AM) I<.\NK1N(; 


'I'lif ;mi()iini of Ixiiids to secure cifciilatiDn is cnnsid- 
crahlv ox ci- oiu'-liall' the capital stock ol' tlie coiiihiiied 
l)anks. sliowiiin' that the hanks were disposed to hold 
iiiorc hoiids than they wvvv I'lMpiirid to under tlu' law . 

'.V2H. Sidtc haiih' iK'tc.s oiitsldiidiiifi.- 'IMiis small item, 
which amounts to only s;{().()00, is a M'stiyc of the ("i\ il 
War period. Many oi' the state hanks of that time were 
conxcrted into national hanks. 'I'he cii-culation which 
they had outstandin^u' at that time could not he called in 
and -S'JO.OOO of it has ne\ci- heen presented lor redemp- 

The items due other national hanks, state hanks. \v\i^\ 
companies, and ai)pr()ved ixserve agents represent the 
{lej)osits made hy othei' hanks. 

.'J2!). Iudhldu(d deposits. — This item represents the 
amount due to indix iiluals and corporations. Tin 
amount si<rnifies the ohlioations of the bank x\hich may 
he demanded at any time durin"^' hankino- hours. This 
ohli^ration is created cither hy the deposit of money or 
cash items wh'ch appear in the ojjposite column under 
these headings, or hy the loans which the hank has 
granted to customers, and corresponds to the item 
"Loans and Discounts"' on the resource side. 'V\\v pe- 
culiar nature of this item x\as explained in the preeedin;^ 

On the hooks of the haid< the individual deposits 
appear under several accounts. Hy far the largest 
amount is recorded in the indi\ 'dual ledo-ers and is suh- 
jeet to clici'k. For some of the deposits the hanks have 
issued certificates of deposit either payahlc on demand 
or at a certain date. These (le])OHts arc not sul).iect 

I . *_ ;4l»; i^.lj- o 1 M 1 M !V 1 !K! !.*! ! I \' ! IM \''! !>!i ' ( M l! \' ! 1 ! >( Hi i ! If ' !'f 'f M !'! ! 
I • ; V : : •- •- r. ;•-::' ^ •'• - i " * / " * i 

ot" the certificate which is ne^otiahle. These deposits 
closely resemble savings dej)o^its except that they re})- 

HANK >1 A ri.MlN 1" l.I AlUl.l 1 1 1 .r 

KMiii a deposit in;i(ic at oiir tiiiu' instead of in install- 
iiiciils. 'I'lif cri'tificate of the hank is soiiKliines ^iNeii 
liy I he hank instead of a note, where fniids liave been 

;{.'}(). I'liilfd Slates (JfjKisits (iiid dcjuisits of Viiiti'd 
Shitts (lishiirsin^ offivcrs. 'I'he (iovei'iinient deposits 
^' cnred hy I)on(Is are (Hxided into two ehisses. Tlie first 
:> more perinaiKiit in eharaetei- and eonsists of fluids 
(iwned hy the (io\i'i-nineiit in excess of tlie (hshurse- 
iiients re(iuiiv(l. 'I'lie second eiass sii^nifies deposits 
uliieh ha\(' been made hy otHeei's of the (iovei'iinient 
t( iiiporaiily hut which \\ill soon be rcMjuired to make 
payments to (iovernment cre(Htors, 

.'{.'{]. lioiids /;o/vorc'<7/. There is no re(iuirement in 
!lie \alionai J?ank Act that the bonds deposited hy the 
I'jinks to secui'c circulation oi" dej)osits shall be owned 
Dutri^'ht by the bank. Some banks find it profitable 
!m borrow from investors oi- other financial institutions 
'\\v bonds recjuired t'or tlu' |)uri)oses mentioned. .So 
InwiT as the bori'owin;^' bank is sohent and the interest 
nil the bonds is paid I'c^ulai'ly to the real owners, the 
l.itter suirci- no disadvanta^^- whatever from having the 

Miids out of theii' ])ossession. 
.■{;{'_*. Xoh'.s- (Utd hills rcdiscouutcd. — This item, so in- 
^i^H'uificant in amoimt, su^'^'ests the <4'i'eat dilt'ei'ence 
lictwcen Amei-ican and l''uropean bankini^'. In this 
ioimti-y it is considei'cd a confession of financial weak- 
ness if a bank seeks to rediscount any of the paper 
Ik Id by it. In Kuro])e, on the contrary, a Jar^e i)i'o- 
noi'tion of the paper ])urchased or discounted bv the 
i';iiik is ac(|uired with the exi)ectati()n of rediscoutitin^' 
I. This is a ureat advantaijc because it nlaees a!!V 
'i.iiik in a position of bein^' able to loan to any amount, 

now in<4' that it can always replace the funds bv redis- 




c-oiiiitliiu' the notes. In thr Tnitc-d States, prior l<, 1<>I.'{. 
when any hank reaelied the hunt of its h)anni^' jjower. 
it was ohh^u'ed to i-el'nse aeeoniniodation to its enstoniers. 
no matter iiow |)ressinL>' their need oi' how (hsti'essin^ 
the eonse(inenees of denying them the I'nnds. The |)rae 
tiee of i'e(hseonnti!i;.i' ])raetieally amonnts to makin^i 
avaihdih' Tor thi' u hoh' eonimnnity the erecht of thr h)eal 
bank in the hii-ner monty mai-kets. The tanh'ness of 
Ameriean hankei-s to adoj)t llu ])i-aetiee ol' i-e(hseountinn 
with all its advanta<<{ ^ hoth In themselves and the eoni- 
mnnity. |)artienlaiiy to the eomnumity. is mneh more 
inexplieahle heeansr the disadxantaucs of {he sys- 
tem appear to he insi<.;niticant compared with its ad- 
van' ages. 

li'.iti. Hills jjfi//(ihlc.- This item, which is ahont six 
times as hirnc a- tiic precedii,- one. sinnifjcs that flu 
hanks June horrowcd oiitrii^ht tiie sum ii|)resenled in- 
stead ol" selhn<4- some of their resonrees. 

ii'.U. ('cr!i/!((I clitch.- 'I'his is an oivlinai'v check 
drawn i)y a depositor which has he( n ei ilified I)y th< 
cashier or othei- ap|)i'opi'iate oflicei' and which has not 
yet heeii presented for payment. When tin hank eerti 
fies a ehec 1- t^ r a mom it is t:ikiii from tin- aeeonnl of llu 
dcpositoi- and placed in the certilied cluck account. H\ 
this act i( hceonies a dii-ecl ohlioaiion of (Ir' Imnk tlu 
same as a |)roniissoiy note. If flu hank should fail 
liefnre it is presented lor ])ayment the holder woidd ha\(' 
no i-ci'onrse iipo.i tlic original di-awci- of the check. Tht 
fact that the holder chose to Iia\<' it certilied instead 
(d' d( rnaiuiiiiL!. pavnicnt .-it the h.'iiik llu-ons the risk of 
lion-paynient npon him. If ll,( maker of the check 
himself had it certilied his liahility for payment is the 
same as iii ijie case of an or(iinary check. 

Xi.~). ('(i.sliiti's chtiL.s niihlituiVtii:^. This item i-eprc- 


M Ills the checks whicli the cashier lias signed on hehalf 
(if the hank against (le|)()sits in other hanks or checks 
ii[)(iii the hank itself. New Vork exchange is the name 
i^iMii to cashiei's cheeks which are payahle at New 
^ iirk hanks and which aii; sold hy hanks throughout the 
(duiitry to persons wishing to make remittances. 


: . 



.•J'}*!. \<iti(,)i(il hniiLs.'-^ V'wx' (liilViriit kinds of insti- 
tutions in the Fnittd Stjitcs nrv included in the o'eriei'al 
t( rin hank: \atioiial hanks, statr hanks, trust coni- 
panics, prixatr lianks. and sa\inus l)anks. 

National hanks nw corporation; wliioh are char- 
tcrrd hy the Federal ( ioxci'nnient to assist the rnittd 
States Treasury in |)ro\idino' f ■ j)apei- eurrencx 
of tile country. The strict limitations iniposrd upmi 
these hanks hy law. (specially tin- law which prohihits 
them from loaninu' on real estate seenrit\-. ai'c od'set li\ 
the pi\ stim w inch their national cliartei- and supers isioti 
hy the examiners ^ives tlniii in tlu' community. 

lili'i- 'Stale littuls. State hanks are chai-tei'cd hy tlir 
several states. The h i^al restiictiotis thrown around 
tliem \aiy widtly hut in general the state statutes ai'c 
mo(|( l(d att( r ilu National liank .\ct. The ditrerenct s 
l)(twe(ii natiMiial hanks and state hanks so fai' as tin' 
lunetions IIkv ixildrm are coneeined. are so unimpor- 
t;nd thai it is not worth w liile to discuss them separatelx ; 
therefore what follows will refei' |)riniaril\- to national 
hanks. Since iht ( i\il W'ai- state hanks ha\e heen al- 
lowed to issue paper cui-rcncy only upon |)aymer>t ot a 
10 pel- cent pel- aimum tax. which is so jiiwh as to he ahso- 
lutely oro|iihiti\e and in conseniiencc the state hanks 
issiK no paper cin-iency. 

.'{.'{S, ri/\<it, hfiiihs. -Vr'wiili hanks -.[vc p.irlnerships 
III wiiieli each of iiK- |)artners is iiaiiic for aii ii«e (jeiit-> 



•if the firm to the extent of his private I'ortiine. The 
Diilv ])rivate hanks oi' any eoiisiderahlt- si/e are those 
ikaHn^- in foreign (.■xehan<i'e. in honds. or in real estate. 
An important I'nnetion of private hankers is the pro- 
motion of new eorjjorations and nnderwritiiio- lor new 
issnes of seenrities. The firm of J. V. Morgan and 
C nini)any is ty|)ieal oi' this ehiss. 

:i:V.K riidcncritiii^-. — When a new issue of srenrities 
is to he hrou^hl out an arran^'ement is usually made 
with professional tinaneiers who understand how to 
make a market for tlirm. >\s the otlieers of the i-or- 
|)(iration issuin^' them aie usually not (lualitied to mar- 
ls( t a vcrv lari>e issue, a speeialist in that line is in 
demand, 'i'he underwriter agrees to sell the entire issue 
at a certain fixed price: sometimes he uels a eoiuniission 
liiit more often he relies for his proiil on sellin<4' the 
s(cin'ities aho\e the agreed priei'. If an issue is larger 
than his own firm can handle he may or,uaiii/e a syndi- 
cate, with himself as syndicate mana<ier. lie then 
;n\ lies other capitalists or lii'ms to sul)scril)e to the syndi- 
cate. If the market conditions are uood the whole issue 
can he disi)oscil of without callin«i' upon the suhscrihers 
to furnish any funds. It is usual in the case of the 
suhscrihers that they know nothing' almut the whole 
transaction from thi' time of their agreement to pro\ ide 
a certain sum if necessa!\\- until they recei\c a cluck 
re|)re.senlin.u their share of the profile. if the issue 
should fail to find a market it may he necissary to call 
upon the suhscrihers to make up tlu loss, or at least 
to uive them the privilci^c of takiuL', up their share ol 
the unsold securities at the syndicate prict'. The \eiy 
lar<.>'e pro])ortion <d' "undi^'csled securities" which so 
trouhlcd the financial world in i;t(i;j ami eaiisid tin ncii 
mans pame of that year, were securities which under- 



-MOM.V AM) HA.\KlN(i 

i> .-»'■■ 

writiiin- syndic-iites had failed to sell to the public and 

had to carry tlu'iiist'lvcs on uiarnin at their haidvers. 

;34(). companies. A tnist comnaiiv was ori«i- 

III » • ^ 

iially not a l)aid< at all hut a company incorj)orated t(j 
execute trusts in the le^al sense. TIr- lar^e powers 
granted to these corporations were. sonieh"ines ■'inad- 
vertently." found to include the powci's necessary to do 
a hankiny- business without many of the limitations of 
state i)anks. In the last twenty years there has been 
an enormous n-routh of this type of instiUition, and it 
has become a \ery serious competitor of both ?iatioiial 
and state baid<s. 

.'{11. li(uihiii>j; dc pari Die lit.- The trust company has 
two distinct departments, the bank dei)artmeiit and the 
trust department, with sets of oUict-rs. The bank- 

ino- dej)artment is con(]<' almost the same as a com- 
mei'cial bank, althou^yh the conditions and laws in the 
diffei-ent localities have forced it to take on a (hft'erent 
ioi'iu to suit the circumstances. In \e\v ^'ork C'itv. 
for e.\ami)le. the trust companies ha\ e specialized lart^elv 
in the collateral loan business. 

Tntil recentiv the trust companies in .\(\\ \'()i'k C'it\ 
were not re(|uire(l to keep any rcscrxc. Instead of 
l)lacin,ii' money in their own \aults. therefoi'e. thev either 
(kposiled in nalion;il banks, receiving; thereon a small 
I'ate of interest, oi- loaned if for .lock e\c!iani;c purposes 
at call loan latis. These loans could i>e converted into 
cash at such slioi t notice under ordinary circumstances 
that the trust companies telt it unnecessary to keej) anv 
other reserve. When the volume of this business 
reached ( iiornious proportions the national and state 
banks felt that they wen' jorced to have on hand readv 
monev suiiiiieni io provide for auy su(i(jcn deman.,\ 
not only at then' own counters bu' at the counters of 

{)!{(. AM/ATIOV AN!) HrsINKSh 


i!I tile trust coinpaiiics as well. Tlicy IVarrd that in 
I line of ^viu'i'al panic the small pt'i-ccntayc ol cash rchi- 
li\i to the (Icniand (lc])<)sits of hoth hanks and trnst 
1 iiiiipaniis wnnld ])rcci])itatc a disastci-. .\t this time 
lli( trust c(impani;s wvvv mcmhci's ol' the clcai-in'^' h(»iisc 
;i!iil in orcK'i' to t'oi'cc the ti'ust enm])anies to Ui'cp I'e- 
Mi\is a I'ide was passed in May ol' UMl i'e(|nii'in!^' trnst 
rMiiij)anies to keep a reser\ i' of ].') per cent in cash and 
III |ier cent in deposits in meml)ei' hanks. .Manv trust 
loiiipanies were at first unwilhnu' to comply witli this 
|iid\ ision and withdrew from the eleai'ino- house. He- 
liiic till' end of I'Jll, ho\\(.\ei'. the leadinu' tiMist com- 
panies chan<ied their policy and rejoined the clcai'in<4' 
liHiise. HeceritK the state of \e\\ \()i'k has passed a 
i.iw r((|iiii'inL>' the trust companies to keej) a resei'xc of 
i ") pel' cent. 

."UU. I)( {losits (if Inist com pdv'ics. Tn a ureat many 
iMcalities the trust (ompany has de\elo|)ed an en'.irely 
Ml \\ field iiithei'to ne,t>leet(,(l hy thi' hanks. Hy advci'- 
tiMMU and other nuans they ha\(.' attracted larn'e imm- 
I" 1^ of personal accounts o! pi-oplc who had n< \ir 
iNriiit thoiiuhl of ha\ iti<i' a hank account. Tlu sc de- 
[ iMlors are j^ivcn the |)ri\ ilei4<' of draw mi '4 an unlimited 
niiiii'M r ol clucks aj.ia:nst tluar accounts anil nvv usuallv 
paid intei'cst on their dail\ halanees of '1 per c-etit. 
While these personal accoimts do uit axera^c \ cry 
lai'^'c. lhe\- ait so numerous Uial the total is considcr- 
ahje. .Most of them arc fairly inacti\e. and the nnmher 
if checks is not excessive. With the improved methods 

1 li(ioU-,( (pinu aiul tin use of addinu machines, etc.. 
the ti-ust cctinpanics have found that it is |)rofital)lc to 
'■.•iter to this class of customers. 

r«f I . rill I 1 1 t < ii 

•"> f'i. / / ^.^( lii ji'ii'i III ( li f . i iiC TiiiSi ir j ),i ii iiiCnt ()I 

lilt tiiist conipaiiN has no hankinu function whatever, 


, = tt 


*.. . » 




'2S |. 

MOM.N' WD H.\\KI\(, 

i"'<l niaiiy tnisl (•..nipauics .In not ])irlcn<l to maintain 
;i trust <l( partnunt. TI,,. iuiportancr cf this hiisiiuss. 
li'-uever. in uunkrn fiiiaiur uarmiitsa brirf (iiscripticn. 
.-Uk Inclhidiial tnisls. \ (Icpartnicnt of ;„,v 
si/<- Mil! !).■ .Iivl<lnl i„t,, lu,, ,,;,,is, an in.livi.lnal aiiil 
•I ('orporatc trnst dcpartnunt . lacli in charu,. ..f a tnisl 
omccr. 'i'lic fnnctinn of tin individnal Irnst drpnit- 
nua.t Is to ad as tnist.v lor the property of i.uhvi.luaU. 
•IS .uuanhan for minors and incompetents, as coiiserx at..r 
"I (Stales, as exeent.»r of wills and adnnnlst rator of lli,' 
estates of intestates. A -real deal of this hnsines. 
'■'""^"^ *" "'^' f''"^^ company hy appointment of the 
'•onrts. The <lnties of the trnst company re.jnire it tn 
"lana-v larnv amonnts of property in the form of real 
estate and seenrities. Hence it is necessarv for them 
t" lia\e a. real estate and hon.l .lepai'tmeni. " The h.)n(i 
•lepartment of many trnst companies I, as -rown heyond 
ilie rniniremenls of trnsteeship int.. a reonhn- l.on.i 
iinnse f..r the •.eneral purchase and sale of vrurities. 

.'M-.-,. C.rpnmtc Irnsls. 'VW crj-orate d.'partment 
acts as trustee mider c.irporate mort<.ao,s and trust 
deeds. Wlitn a coiporalion wishc I., issu.' honds mider 
a smul, m..rt,:.a,oc it is imj.ossil.le (or each one ..f tli- to liave a separate mort^aov. The trust 
comp;ui_\ Ik, Ms th.' mort.tja.M.' sui./iect t<»"the l.rn.s pn- 
^'•'•;''cd in th. h.,n.l. an.l in case of .lefaidt of principal 
•'.'' '"'••'•est on th.' l..,n.l it a-ainst tii.^ corpora- 
tion in th.- int. rests of ail the [...nd holders. It also 
acts as fiscal ay. lit for c..r|).iral i..ns. takin.n eharuc of 
the pa\ I,, .tils ..(■ coupons wj,,,, fl^.y arc ^ur an.i r< c. jv - 
In- and linldinL;' sinkini.' fun. Is to provid.' for the r. tir.- 
"""' "'■ ""• "hlioati.ins at maturity. Wlim an i-suc 
•■i" '"'M-is Is suhj.rt to n.i.inptM.n'lh.- triisl .•..nipanx 
may tak.- char-,, of lh.. .Irauin- of ih,. nnmhers .an.l 



till |);iyiiu'iit ol' the call bonds. 'V\\v trust c'(>inj)aiiy 
iiia\- act a^ rcyisti'ar I'or coi'porat ' )iis, aiitliciiticat iiiy 
llic issues ol' stocks and lioiids in ordci" to prevent an 
'!\ ci'-issui'. It tr((|ueutly acts as ti-aiisfer ayent i'oi" 
; "i])()i-af ions it' it is located in a central city. In the 
i->e of failures a trust c()ni]);uiy sonietiiiies acts as I'c- 
ciiver under the direction of the court. All these fiuic- 
linns arc of niod( rn ilc \ tlo])nient l)ut so nci'cssary have 
tli( y ticvoiue tliat it would iie almost inipo.ssible to di.s- 
|:i use w itii Iheni. 

.'iltJ. Sd'iin^^s Ixnihs. - A sa\in,us hank is really not a 
I'.ink at all. if the word is restricted in its use to institu- 
iiuiis \\liicli pro\ ide a niediuin of exchan^^e. A saxin^s 
j.iiik is more closely n lated to the iiivcstnient company. 
Its pui'posc is sim|)ly to recci\e funds in small amounts 
I'M- investment in sccui'itits or I'cal estate. The dei)osits 
nt not suhjccl to I'heck and the hank may cxtii n'ciuirc 
ihlity days' notice before niakini'- payment, t'onsi'- 
'iiKiitly the savinn's bank is under no necessity for keep- 
'iii; a rcsei'\e. ( )n tlie other hand, the sa\ii(,i>s bank no credit which it can loati and receixe an incoim- 
•!|inii. The business ot' the savings bank is simi)licity 
itself. It simply L>athei's together small sums which 
"f themsehes are too small for inxestment and pur- 
iliases witli them inl( rtst-yicldin^' secui'ities or mort- 
Liay'cs. The} usually |)ay interest of 'i ])er cent or more 
! > dcposiloi's. wh.ile the income iVom the in\ I'stmcnls is 
iisnallx' below .") per c( nl. In some states, like Massa- 
iliiiMtts and \ew N ork. w lit re the laws restrict wry 
closely tlu' securitiis in which the saxin^s ma, be in- 
vested, thus forciuL; the savinus \y.\\\\\ to buy onl\- first 
cias^ sei'Unilcs, iiie in;iii;in in i i i(|tiiiiii_\ iii;iii i pti 
cent. The e\pi ns-.s of the business, however, are so 
small that ev ( n a I pi r c( nt margin is prolitablc. 




MCM.V AM) B.\\KI\(, 


34.7. The <>r;u;(in'rjtth,,i of a J)anl,\~'V\w usual nutlio,] 
of or<rnni/iiio' a l.aiik is first to <.(t a subscription ,,f 
the iiiccssary capital. Kcccntly c()ni])aiiic.s have Ihtii 
I'onncd for the purpose of opciiin"- new l)ank.s in coni- 
mtinities uliere the i-ecent niowtli of husiness has justi- 
fied their estahlishiiunt. 'I'iiese c-oinpanies. when tluv 
ha\f found a locah'tx which promises to dt\elo|) siidi- 
ciirit business lo he prolitahic, provide the capital and 
the oflicers. Wdit n the iiank is once started and the 
peo[)le of the conmiiuiity interested as de})ositors and 
patrons, then the or,uani/in<>- company sells the stock to 
local capitalists and emi)Ioys the cai)ilal in estahlishinn- 
new hanks clsewhci'c. 

.'U<S. I'Jvolnlion of Ihr haul,-. In cf)mmunities of 
slower nrowth. however, the hank is usually an evolu- 
tion. I'^irst the local merchant or wealthy farmer with 
idle capital makes loans to his tiei«4'hi)ors and friends. 
As the oi-i<.inal capital >j:vn\\s the nierchant or farmei' 
may find that the loaning' business with all its details 
is becoming- niorc ini|)oitant than his renular occupation. 
People lia\e leai'ned to tiMist these men in their rc<,nilar 
hues of busin(ss and intrust to them for safe kcc|)inn' 
their sa\ in->s oi- \aluablcs. Tluy are also asked to take 
charge of istafes and are consulted with I'cfercncc !o 
iiiNestmcnts. etc. In the course of tini" these men find 
it necessai'y to ha\c sej)nratt' ollicis arran.urd for the 
convenient ti'aiisaetion of this financial !)usiness and jxr- 
iiaps to ha\c assistance in tluir bookkee|)ino-. This ma\ 
gradually develop into the pr!\at'> bank, or the si/e o! 
th( businiss max make it advisable to take other men 
into tlu' business. 

:u«t. \h.,ll>>.iJ- r. \ :,.,.,...,,,,,..,f. I I ,, ! ,1 

stockholders are tlu ultimate authority. Their powci-. 
ho\\( \ er. is all ilc lei4at( d to a numbei' of dii-cctoi's. Onee 

()R(1.\M/.\'II()N AM) msiNKSS 


i^in to 

I year the sliarelioldcrs ol' tlic l)aiik have tlic r 
•Imosr (lii'cctors, after wliieli they are entirely powerless. 
t\eej)t ill cases of fraiui on the i)art f)f the directors, 
until time for a new election arri\ es. 

.'{,)(). Directors. — It is upon the directors that the 
A\hn|e rrspoiisihility ot' the hank falls. The National 
Hank Act makes certain re(|uiremeiits of directors which 
;ii( set forth in the foUowiiitr st'ctions: 



^ic. •")] t."). 'J'lu. .iff'aiis of lacli a^xx'iat ion sliall 1)(> niaiia^rcl 
In not I('-> than fi\f ilircchirN. who •>liall l)i' flcctrd l)v the sliaro- 
linldns at a iiK'rtino- to lie licld at any time Ix't'orc tin- a>s()i'iatioii 
I- aiithori/c'd liy the Conipl I'oilcr ot" t!ii' ('unxMU'v to coninuiu'e 
tliu l)iisini->> ot" hanking-, and afterward at ni('itin<;s to he hold 
(in >Ufh day in .January of each \vnv a> is >})vciHi'd tlur('t"or in 
!lif artick'> of association, 'llw (hri'ctors sliall hold ottico for 
one yiar. and until tliiir sUccT^sors arc L-kctcd and have (jualifiod. 

S( c. .")! 4(). livery dircctoi- must, (hirin^' his whole term of ser\- 
Ki. I)e ji eiti/en of iiu' I'nited States, and at least three-fourths 
it' till' directors nnrst haxc resided in !he statt'. territm'v or 
(li ti'ict in "hich the Jissociatiou is located for at least one vi'ar 
nnniediately pn cedinej their t'lection. ami nuist he residents 
therein duruij; tlieir continuance in office. l'.ver\' director must 
nun. in his own ri^ht. at least ten -.hares of the c.ij)ital stock of 
the a--sociati()n of which lie is a director, unlo- the capital of 
the hank shall not exceed ^!^."),()()(). in which ca^e he must o«ii 
in his own right at least five shares of such capital stock. An\' 
director who ceases to he tlie owner of the refjulred lunnher of 
shavis of ''>e -.tock, or who heconies in any other manner dis- 
i|iiali(ii (1. -hall thereby vacate his place. 

Sec. .)1 i-7. l".a<'h (hreclor. when appointid or elected. >hall 
t.ake an oatii that he will, so far as the (iut\ devohcs on him. 
diliirentiy and homslly administer the .atralr- of such assnciatimi. 

1 iti(|. anv of the provisions ot" this title, and that he is the owner 
m good t'aith. and in his own rijiht, ot" the numher of sh.ire- of 


.M()M,\ an;) hankim. 



slock •■((|iiir((l h_v \\\\> title, viil)>cril)((i In liim. or ^tamliiifr In 
lii^ n;niir on tin hooks of this a»ociatloii. and that tin -aiiir i> 
not li\ {lotlifcatid or 111 aiiv wav plcdj^-cd a^ >ccurltv for aiiv loan 
or <l('l)f. Such oath. -nl)>crlhc(i h_v the director making- It. and 
foi-tlficd l)v the oHicer het'ore whom It l> taken, sliall he liuniedi 
atclv tran>inltted to the ( omptroller of tlie Currencv. and shall 
be filed and pre^ei-vcd In h|^ otiice. 

Sec. .■)f^;j!). And in ca-e> of Mich violation e\er_v <lirector who 
partic-ipated in or a>^eiited to the sanie >hall he held iiahle in 
ln> pei'-onal and Individual capacitv for all dania^o which the 
association, it^ >harelioiders, or any other |)er.-on >iiall have mis- 
taiiicd in con^((iuence of such violation. 

Sec. .").'2;5!). If the directors of any national i)aiiklno- a->>ocia^ 
tion >hall know ln;;l\- violate, or knowinolv permit aiiv of the 
officers, a^cnt-. or >ervants of the a-^ociat Ion to violate. an\ 
of the pro\i>ion< of thl> title. ;dl the ri<^'ht>. privileo-es. and 
franchix > of the association >hall he tlierehv fort'eited. Such 
violation >hall. however, he di teriuined and adjiid^cd l)v a proper 
circuit, district, oi- territorial court of the I'nited States, in a 
suit hroii^iit for that purpose hv the ('oiiij)troller of tiie Cur 
rcncy. In his own name, Ijcfore tlic association >hal] be declared 

Ill recent years the responsibility of the directors f)f' 
l)finks lias heconie an iinpoi'tant (luestion. With the 
increase in the si/.e and the complexity of the hnsiness 
of a hank it has heconie more ditlienlt to o'ct business 
men to ser\e on the directory who are willing to con- 
sent to contribute enough of their time to ^ct fidh' 
and thoi'ouohjy familiar with the business of the bank. 
It has never \)vv\\ customary to ])ay salaries to directors 
and llic smnii fee of '^') to -S-JO pei' meetino- js not sutJi- 
cient ti) .justify busy men in Ki\ inn- up much of theii- 

.'}.)1. ('onsidtrdlioiis /,»7>r<7v////4' cJ/oicc of directors. 
''he eicdit (if tlic bank and its atti-acti\ eness to depos- 




ituvs (Iri)eii(l ill IK) siii;ill incasiirc upon the rc'])ntation 
"I the iiR'ii on the hoard ol" directors, and hence it has 
lieeonie the custom to select men for that position whose 
names are hkely to [)rove a husiness asset, not only 
aiiion^r the business men of their particular line I)ut with 
the n-errcral public. Jn iiiost cases these men are not 
familiar even with the rudiments of bankin-^- au'l in 
many eases rarely attend the meetings of the board. 
I'lider these circumstances it has been comparatively 
.asy for dishonest otlicials to use the funds of the bank 
in their cnvn private interests and this bas often resulted 
ill the ruin of the bank. In an address before the Penn- 
sylvania Bankers' Association in Philadelphia in IDOd, 
Mr. William }i. Uidnely, at that time Comptroller of 
the Currency, made the followitm- radical statement: 


.MTjit from vc ry nu'c ami ixccptioiial causes, such as suddfii 
|ianir> or lUiis (luc> to fal-L' niniors, tlicre is iiewr aiiv rua^oti- 
mI)!c' excuse for the failure of a l>ank or \y\\^\: company. It is 
almost always the result of iuexcusahle folly auil itieompc tciice 
IT (lishoiiisty and fraud, and often ilw.' to all tlu-i eoiiihined. 
ll'/(<7/ (I })(ink (Iocs fail, it is flic i'milt <if tJic hoard of directors. 
Many others may he to blame, pcrletjjs more than the directors, 
Ijiit the final r('s})()n>i!)ility of i)ank managenniit rests u])on the 
(iirectoiN and they are to blame. 

Jn many cases the federal courts liavc declared that 
a director's duty is not !liscbar'''ed b\- merei\- electin<>' 
iithcers of ^-ood rej)niation, ability and integrity to nian- 
a<.>e a bank and then leavin^r its business in their hands, 
'i'he board of directors, the courts have held, is bound 
I'l maintain a su|)ervision of the affairs of its associa- 
tion, and to have a ^>'eneral knowledge of the character 
iu' its 

M I .-) 1 I IV .'P.S < 

iiiii liiC jri.UiiKi' iil V\"iiiCi"i it iS voiitiueleu. 

M(l to know at least upon what security its larger lines 
'i' c'redit ai'c given. 




;j.VJ. //r/>^'-.s t'. Spauldin^. — The riiited States Sii- 
pi-fiiie Court decision most in point is the case of Hri<4<,''s 
V. Spauhhng, whicli was a suit hroufj'ht by the receiver 
of the First National liank of Hufralo against the de- 
fendants as directors for failure to perforin fai+h^'uily 
and diiio-ently the duties of their ofhees. It was alleged 
that they had failed to call and hold nieetinnns. to ap[)oint 
any eoinniittee of examination, to reijuire bonds, or I) 
make personal examination into the conduct and man- 
agement of the affairs of the bank. l)ut that instead ijiey 
allowed the executive officers to manage it without super- 
vision. In rendering its decision the court said: 

\\ ithout ruviiwiiiu- tliu various (iccisions on tliu siihjeot. we 
liold that directors must exercise ordinary care and prudence in 
the administration of tlie aH'air> of the hank, and that this in- 
cludis Noniethin<i' more than officiating as fi(rp-"l)ca(ls. Thev are 
entitled under the law to connnit the baiikiii^ uu-incss, as de- 
fined, to their duly authorized officers, l)ut tliis docs absolve 
them from tlii' ihity of reusonal)le su|)ervi.-,ioii. nor ougii: tlipv to 
I)e ])ermitted to l)e shiehk-d from lial)ility because of want of 
kn()wl((io(. ,,, wrongdoing, if thab ignorance i- the r" ult of 
frross inaJtention.' 

The law recjuires more of directors tiian a reasonable 
care in selecting the officers of the bank. Although 
there lias been great difficulty in charging the directors 
M-ith civil liability for ignorance in cases where banks 
have failed, yet the federal courts have laid down cer- 
tain princii)les wuh which every director should be 
familiar. Referring to the case of Briggs v. Spauld- 
ing, the court in another case said: 

In my opinion it flocs not meet tlie requirements of this state- 
liivi'u ;;r ;iu i;iv> rii.u ntJ\if'*rs iii.i\ euuinic iiit' iiiuiii'ia't'iJicnt (m 

1 Brijrgs v. Si)aiil(Iinfr. Ill V. .S. 13^. 





'1^' '-puMliun. of f|„. hanlv Im a tni>tr,i n|firia|. ,,,ul tlim ivpoM' 
"i""i II"''- vnutuUuvr i„ 1,1, n-ht <'nn(l.u'( «,tl,„„t ni;.kii,u- ..x- 
■niii-iati,,.!, tl„.|ii..|\r>. nr ivlvin- „|HUi lil> aiiMNrrs to <rnHvnl 
M'i'-finn, put t., luVi ultl, iv^anl f- tlu' .faf,i> nf tlu., „f 
'''■' ''■■'"''■■ ''"'"' i''''-' i- !i"l to !)>• t()lrr,-.|.,l that tl,, v as 
I' -iMr.l nniaiMcriK (,f i|,r in>l it , if i,,;,. fo chiiancc its al- 
l|-.u'tiv..Mr». ,„• tliaf fluir r, put;, linn. .|h,„1,| 1,.. „.,■,! ■,> a linv 

'" ''"^^"""■'■'- • ■ • II i- i""MiiM.t,iit ritli III,. purp..M.> and 
rliVv offli,. Ha.ikin- Art that iU vital i,,t,.n>t> .inaJ.I in- rcai- 
!iiitl.d to one man. uithont ovn-siuht and coiitroj.- 

:{.).'{. I^iioniucc IK, r,rr//.sr. J)irc(t(.rs iii;iy not cx- 
ciisr tlicmst'lvrs iVom liability on tlic plra" of i^'no- 
r;i!ic-e. Allliouu], it is a physical iinpossil)iJitv''ror 
'nnctors to liavc iK'r.s..iial kiiowlcdoc „f tlic condition 
"I' the hooks and funds of a very iaroc bank, yet it is 
pKssihle and even imperative for them to emplov puhlie 
■'••'•"iintants to make andits of the affairs of tjie hank 
iixlependent of the federal or state examinations. 

;{.U. Sii/)j)lc'nu)/tar// (WaniinafioNs //(rc.v,sY//7/.~-The 
t;i'l that the National Hank Act re(|uires a fre(|uent ex- 
animatiw,, ,,/ the hank hy re<.niarly ap[)ointed examiners 
1^ not sntheient. These examinations art' neeess, rily 
i'"'^nij)lete heeanse of the limitations ])laeed upon the 
I vaniiner. l/nder the older methods of doinu- the hank- 
iiii^' iuislncss no loan M-as o-ranted until the directors had 
s|)criHcall>' authorized it. Applications for loans wore 
'•""ided in an offerino' hook which was placed before 
llic hoard at ev^ry meetinn-. and no loans were o-ranted 
until the formal consent was ^'iven. This method is too 
^l<m aiid cumbersome in these days and it is doubtful 
"Iiether any number of directors would have sufficient 
n-ctiii inroi-mation to intelli;^ ■ tly aulhorize every loan. 
However, it is not too much to demand of a board of 

-Gibbons V. AiidiT.'-'in, SO led. Uqi. 3tj. 






(lirci't())'s that tlu'v be I'amiliai- with every loan which 
may Ix'coine (hui^erous to the haiik. I\\|)erience lias 
shown that lar^e losses ha\e o'.eurred only where the 
directors have allowed the law to he violated bv loaniu''' 
iiior( than 10 pei' cent of the capital to one ])erson or 
corpoi'ation. 1 'in'tlK rnioie, e\ery loan made to a direc- 
tor or otlicei" ol' the hank should he carel'nlly considered 
ill the hoaid meetings. I f e\ t-ry director wei'e familiar 
with these two ty))es of loans and exercised his l)est 
,judiiinent in passing' ii])oti them there would he feu- 
lossi's from thestsou. -es. Moreovtr. it would he impos- 
sihlr to deceive the directors reyai'din^' such loans he- 
cauM an ir.dependent auditoi- instructed to report 
s|)ecially upon this point could not fail to discover any 

.■{.")."). Ojiiii/Dii of Compl'-'^Ucr li'ul^chi. — On this 
point Mr. Hidnely sp'-'iiks as follows: 

Ali()\c ail. till' (lirc(l(..s of a l)aiik --lioiild ino-t closely scru- 
tiiiizr tlir liiaii^ to iitliccrs and otfiir director^, and >t'i' tliat tin v 
arc kcjil down lo not onlv lc;^al \\\\\ safe amounts. 

l"ar tlic uii)>l I'rctjiunt cau-i- of haidv trouhlc^. in fact, tin- 
alnio'^t iiivariahlc cause of janlx i'adnrcs. is tlic <;rantinj^ of 
credits fai' hi sonil tlic lc;;al and |iiiidcnt limits to the officers in- 
to one I'onci rii tir j;rou|) ot allied concci'ti'^. ^i lu iail\ owned 
a; 'luiia^ed Iiv the officers or dii( ciors of" the hank, or in winch 
tliey have diri'ctlv or indirectly, some li;r^c })i'Ciiniary interest. 

Wlien a l)ank is in anvtliiii^ approaching this (•(iiiditioii, it is 
in grave dangir, for its entire safctv di pi luls on the surccss of 
oiit-idr t nil I'prises, and tin man who should |)rf)tect the bunk 
has, perhajjs, a greater interest in protecting tlic other con- 
cern. It is j)rohal)Iv the most coninion, serious dereliction of 
duty on the part of" directois to allow such a condition as this to 
gradud t' 'U in a i)anls. It may sometimes lir done honestly 

ns the ! f of hau judgment only, l)ut in my i \pi rienco it \* 
the most r iiei; ctiusc of dishonesty niiii tiiud amonjj ban!-. 





officers. I (Id not n'lnciiibLr a case wIiltc a liank dtiiicr iiad the 
moral courage to let loans of this kind lanv down his hank 
«i'hoiit rooi'tiiig- to crliius of -onu' kind to conceal or ])i)->t pone 
the catastrophe, in hopi ■- that ^dme t'ortiinde ciri'uni^tance nii^^iit 
inter-'eiic to save hini and I'oni'eal hi^ fraud. 

'Ihi- fimctioti ol' the honi'd of diivctors is lo assimu' 
the responsibility t'i)r the safety ol' thr \nink and io (kdci-- 
miiif the o'eiicral policies which shall lie pni-sncd. With 
the active conduct of the business it has nothino- to do. 
This function is delc'^'atcd to tlie otlicii's, the cliirf of 
whom is the |)resident. 

.'{.)(). TJic j)rcsi(lii!l. The president is alwiys the |)re- 
sidino- ofHcer ol' the hoai'd of directors, it devolve.s 
ii|)(»ii him to see that the directions of liie hoai'd are 
carried out. In some cases, espeeiall\ where there is a 
this !uinii!\- hoard ol direetoi's. the president exercises the 

whole power. In other cases he sim|)ly carries out the 
' ill of the board in tlu' administrati\ e details without 
iiav ino' even th(> authority to o-rmd a loan. I'sually the 
powers and dutit's of the president lie somewhere be- 
tween these two extremes. The boai'd as a rule deter- 
mines the maximum limits to which credit may be 
cxlcndi'd to |!articular (iiiiis, and leaves tlu |)r« sidcid 
wide discretion in orantino- credits between these liimts. 

Ill lai"o(' banks tliei'e are \ iee-pri'sidcrds who share 
.^ dii the presideni the didy of ne^'otiatino- with 

;{.')7. Tlir cdsliicr. The cashier of the baid< is its chi(d' 
.'Xicutixc otlieei-. u|)ou whom falls the duty of opei'atin;^ 
the bauK, He has direct <'harL>f td' all the employes 
and must of I'otn-se be familiar with the details of every 
•Icpartmeid. He usually acts as si'ci( tary ot' the boanl 
■if (hri'ciors. it is ins duty io prepare iiie reports and 
'I'tmeuts. Ml is llw ullicer ( inpowei'cd to si^ii doeu- 



iiK'i'ts Oil heliair of tlie hank. His sif^iiature must 
alnays a])])eai- 111)011 tlic eirciilatino notes issued or the 
checks and (h'al'ts dcawii hy the hank u])( its corre- 

In most lianks which ha\c not yet developed a s|)eeial 
crechl d'|);n'tnien! the cashier is the ehiel' credit ofheer. 
\\ hilf th( president or \ice-presidenl usually ivtaiiis the 
autlmrity to yiant loans, he usually depends upon the 
cashiei' for inrormatioii as to the cre(ht responsihiiity 
n\' tin a|)i)lieant. In those hanks where the list of hor- 
rowci's has heconu' extended and where the adxantan'c 
of a credit hiirea.u is recooni/ed. the cashici- iVcijuently 
has an assistant who has sj)eciali/,e(l in this field and who 
understands how to accumulate and systeinati/e informa- 
tion aH'ectin>4' the financial status of the [)atrons of the 

The ei( (lit departnieiit of a hank i)ioh;ih!y oi!'ers more 
opportunil) for an employe to ac(|uaint himself with 
the science of hanking in general than any other depart- 
luent. The husiuess of a hank is of such a routine char- 
ac-ler that the emj)loyes ha\e \ery little op|)ortunity to 
learn tlie husiness from the inside, or to tiispla\ initiative. 
or to perform duties re(|uirinjjf discretion. ! nlike most 
husinesses tlii're is no line of jiositions which i-e(iuii( 
successively more and inoi( husines.s sagacity on the part 
of Ihe ocdijiant. The ^ulf hetween tin highest em- 
ploye and tilt ollieer is a wide one and very dillicult to 
cross; in most lar^e city hanks it is |)raetically inipossihle 
to cross, and tin- oHieers are usually reciuittd from small 
institutions where the emnlo\ e has had an oi>noitiunf\ 
to learn all departments of the hank. 

.•J.>H. P(it/in(/ teller. — i\ii imj)ortant (mplo\e of IIk 
hank is I he payin;.* Uiler. in charge of all iii( (lut- 
g'oing I'lnuls o|' the li.inlv. The transaclions which 



a(iuire the paying out of cash are: (1) Cashing- of 
clieeks presented at the bank; (2) payment of debit bal- 
ances to the clearing- house; (3) shipment of euiicncy 
to correspondent banks. It is the (hity of the jKiyinir 
teller to see that all the cash of tlu- bank is ])roperly 
accounted for. It is necessary that he be familiar with 
flic siuiiatures of all the (ki)osilors so that he may make 
iiu payments without havin<>- pro])er vouchers to show 
!.ii them. Hanks are under legal rcspdn^ibility to de- 
positors to pay out no funds on tluir account excei)t 
t • the proper payees or their order. Kven if the signa- 
ture on the check is genuine, still the jjcrson demanding 
pavment may not have ])roper title to the check or he 
may have altered it. It is. therefore, the duty of the 
Idler to safeguard the bank by re(iuiring proi)er en- 
dorsement before tlie cluck is paid, so that m case the 
depositor attemjjts to repudiate 'in ■heck the bank can 
;ill upon the payee for ih mibnrsemeid. 

:$.•)«>. Jiecciviii;^- tclltr. — The employe second In im- 
portance is the receiving teller. I'nless there is a note 
cl.ik in the baid< it is tl. duty of the i(cei\ing teller 
to lake in and account for all the funds which come 
into the bank. His chief duty is to receive cash, checks, 
(hafts, and other items, and to give credit to dei)ositors 
tnr the same. His principal duty is to assure hiniM-lf 
that everv item for which credit is given is collectible. 
Funds comi' into the bank from { 1 ) depositors. (2) 
credit balance s at the clearing house, {li} i)ayments on 
maturing j)aper held by the bank either as an asset or 
for collection, and ( t) currency shipiped by correspond- 
ent banks or by the Treasury of the rniled .States. 

;j«)(). Xolc Itllcr. Where the business of a l>ank is 
extensive iitongh to re(|uirc it. there is a note teiier 
whose function if is to make all the collections. Matur- 




ino- notes payable at the hank art 'w his chai-f^e. He 
!-ecei\t s all eas mittaiices from lail-ol'-towii eiist oiners. 
He lias (lirec liaroe of all the eojlectioiis of drafts, 
etc., ill the city, except the checks on clearin<>- house 
hanks, wlileh are usually attended to hy the clearing 
house eJei'k. 

;3()1. Di.scn/nil chrlc. — The discount clerk has charge 
of all the loans and discounts of the hank after they 
have been negotiated hy the ollieers. It is his duty to 
keep the documents so systematically that there will he 
proper presentation made of them when they matiu'e. 
When due the interest is cali'ulated and the noti' turned 
over lo the note teller foi- collection. He has charov 
of all till' collateral held to secure loans unless the bus- 
iness is so large as to r(i|nii'( a en||atei\d loan cierk. In 
l»ard<s ha\ ing close I'dations -villi stock brokers the latter 
|«'Mtioii may l»c a \vv\ icsponsihle one. The collaterals 
held to seciii-e loans to stock hrokers are constantly hring 
withdrawn, substituted and replaced. Furthermore, in 
times of active speculation, the values of the collaterals 
arc shifting so rapidly that the collateral loan clerk lias 
great resj)onsil)ility in seeing that the margin of security 
d' niandcd hy the hank is maintained and the call for 
:iddili(.Mal collat.ral is propcrlx si nt out. so that the 
borrower can lia\i' no grounds of c(.mplaint if the hank 
liuds it necessary to sdl the collateral to |)rotect itself 
in a ])anicky market. 

;{<;■_'. JiixiLhicpiiiii' (Ii/xirtmcnt.—'Vhv Iransactlons of 
all the tellers and other clerks are finally referred to the 
bookkee|)ing depari ini nt . There is alwa\s a genera! 
ledger u\' the \ku\1 containing the accounts summarized 
Ml the hank siat(ni(iil. It is th<- duly of the ovnerai 
bookkeeper to iiiak( iii) a dailx >lat( tneiit show in. > the 
^•""•hiinii of III, hank and all statements re<|uin ,1 b_\ the 



, iiiii|)ti'nlk'r of the ciirreiicy. 'V\\v Imlk ol' thr book- 
Lii [)iii^- work falls upon tlic iiulividiial ledo-ep keepers, 
whose duty It is to chai'^c to the depositoi's' aeeouiits 
e\erv cheek di'auii hy the hittei' and to credit their ac- 
counts with all the deposits reported hy the receiving 
teller. The bookkeeper must keep the paying teller 
iiifoniud as to the lialances of depositors. 

In many hanks there is a separate dej)ai'tme''t for 
liandling eorrespondei\ce and the collection of out-of- 
Imwii items. It has hecome the custom of late years for 
II iiiittances to he made in checks on local ])anks rather 
than in \e\v ^'ol•k exchange oi- tnoncy orders as for- 
Dicrly. In some cities the hanks ai'c so anxious to secure 
tilt (kposit accounts of lai'ge firms thai they make no 
charge for the collection of local checks, although this 
may re(|uii'e con'cspondenec with a multitude (d' banks 
in all ])arts of the I 'nited States. 

.'$•!.'{. Lii:cs rt'ldliii^' to collections. — Kvery (le|)osit in 
a hank other than cash must be collected. If the item 

N ;i chfcU on the bank itsell' oi- a matured note payable 
:i! tlie hank, it is paid as soon as the baid< gi\es ci'cdit to 
iiic depositor. Hut if the items ate payable hy another 
paity the bank is usually c-onsidered, in the absence of 
a special agreement and when the items are endorsed in 
lilank Ol in full, to be the bailei' of the di j)ositor. The 
deposit is in fact a special deposit until the proceeds 

i' the I'ollection aic lodged in the bank and credited to 
the <iepositor, whifeiipon the relation between bank and 
dc])ositof changes to that of debtor atid creditor. 

As bailee, tiic bank has all the righis to the pa|)er 
1:! ill and may sue upon it. In ti'c evtni if its noti-col- 
I'ction the bank ma\- rescind the credit alread\ liixtii the 
depositor, thus pio\ ing that the bank had not purchased 
the paper and taken title. 





Insolvency of a hank revokes its power to collect and 
It mnst l.ol.l nneolleeted paper as a special deposit of tlu 
ouner. If :t receives proceeds of a collection and then, u ith the general funds of the bank it is 
^nilty of fraud. 

A collecting- hank should accept nothin- hut nionev 
-" pay.uent hut it has hee.. held iunocent (,f ne-liLrenc'e 
whe.> ,t ha.l taken a certified or even an uncertif .d duck 
winch .. presented to the drawee hank without delav 
and the takn.o- ..f which cause.l no loss to the owner of 
th, collcctH.n iten, hy reason of release of endorsers etc 
;, I-"""''-payn.ent of the cheek taken in pavnient of 
til.' eollcctiou iteni the hank should recover the item if 
P-SH .c- the san.e day an<l protest it. J^avnient hv 
worthless check is no payment aud the hank (V.uld pn,'- 
test the Item even if the payer refused to ^Wv it up 

If a colleetiou item is endorsed "For collection and 

mn.ttance. the. proceeds becon.e a part of the <.eneral 

nnds ol ti,e hauk as soon as a draft is rcn.itted, ami if 

ihc draft proves worthless the owtier of the colleetio,, 

cannot chum the funds as a special trust deposit 

if the hank has collected a check heari.,^r a forLred 
endorsen.ent. the proceeds heiong to the ri^d.tful ou.ur 
•"Hi n.ay he collected hy him althouo-h the hnuk ha. 
t.nned over the proceeds to the person dcpositluLr th. 
item. " 

A \ew ^•ork hauk reeeive.l a "tramp" collection (one 
"■''""^■' '•> ••' ^^'••■'"^■^■•- ^^itl' whom it ha<l no account), 
col lecte.l ,f. .ieducted its collection fee. an.l re.nitted 
'^'';'''' '"'-"^'^ <'>'l that the cheek had heen lost in the 
'"•"' alt<r Ik,,,,.. ,.udo,-sed in lull; the thief forord the 
c,.do,-Mme>,t ami sold it loan iunoe.nt pa.'ty who sent 
'- ■''- * ■- - --- \ ink i-..i,k for eoiieetinn-. i),^ {j.,,^. ,,.^.„^,,. 

U 4.. »!... \- 





recovered from the hank, w hicli was uiiahle to locate the 
])( i.soii to wlioin it had paid the j)rocee(ls. 

Hut a (h-a\vec hank caiiiiot collect the proceeds of a 
raised check i'roiii a collecting hank if they have heen 
paid over hy it to the owiRr of the item. 

.'}(U. Liahilit// of col lectin^- hanJx. — When a hank .in- 
(Idiakes to collect, it makes itself liahle Tor all losses 
caused by its neglitifenee, hut it is not res])onsihle for 
\]\v iie<'l!''ence of a notary selected hv it with ordinary 
care because the notary is a public (Mlicer. 

The law varies in the different states as to the liability 
of a collecting bank for banks to whom it sends the item 
in course of collection. In the federal courts, and in 
l'( imsylvania. \ew York, Xew Jersey, Ohio, Indiana, 
Michigan, Montana, and Minnesota, it is held that a 
collecting ]):uik is Jxiilcc and liable for the agents it se- 
lects to make the collection. In the otiier states, the 
l)aiik is held to be the (i^cnt and renders itself liable i'or 
sub-agents aj)|)ointed by it only to the extent of using 
(Ilk- care in selecting them; be\ ond this the sub-agents 
;i!( responsible to the owner and may be sued by him. 
It is held to be negligence for a collei'ting bank to remit 
tlif item directly to the drawee bank, since that bank 
may in ^'e an adverse interest. 

Hanks do not succeed in avoiding resj)onsibility by 
printing in the i)ass books notices that they will not be 
liable for the acts of l)anks to whom they send items. 
Such contracts have been held to 1)e void hy the courts 
on the same j)rinclple that railroads cannot avoid lia- 
bility for accidents to i)ersons riding on j)asses even 
though the pass bears on Its face such a disclaimer. 

1 '■ a note is payable at a bank and funds arc kept to 
pay it, the bank is the agi'ut of the nuiker and if the 





l.a,,k I'.il, l,,f„,r IIk. h„i,lc,- „r (1,0 „nt, J,,,,, ,,„„„,■„, 


cove,- t M • , "'' •■""' "'^ ''"""' '"'"k 'I- 

emus l,.,l ,t has pa„l i,v n istak.. fiore hci,,^, „„ f,„„,, 

tl.e colfcctu.K l-ank is safe :■., ,-ct„„,i„j, .i'. ,„, , i' 

and recen-n.^. „„ck tl,e check. The c„d,„.se,/a 
K-leasc cvc, „ ,„., „ , „.,.,^,, „^ ^,_^ ^.,^^_,,^ .^ . ^^ - • 

The n kc- appcarc, ,„„I sai.l he ha.l ,„a,le an-a„Ke. 
i"U,ts /,„■ ,ts ,,.„ewak The cashic,-, h.nvcvc,-, hisisLi 

recenei „sln„.|,„„s to ret,,,-,, the „„te. lie se„( the 
>roeee,ls M.stea.k Me >v„„l.l „„t have hce„ i„s ie,l 

Z2z!:::i::;:r '''"''-' --'^"'^''-'^''^^'^ 

-M:, Clhrii,,,, of o„t-of-f„!,„ rf«V.-,,-The collec- 
tion of o„t-of-to„.„ i,e„,s is pe,.l,aps „„e of the ,e n t 

r:,-?,, ;""""■. '"-'-•■" ™i-ia.e,Mti! ol eolh.ct,„^. an ,tc,„ averages ahout ei„htee„ c-nts 
; -:'" as ,„||o„.s: Exchange ,., cent, ^os e ,d 

•I -Heefon «... Small l,„„k.s shift the txpe,,. 
o the h„«e,. hanks hy keeping a-vounts with I, a„.l 
'lq««,t,„«. all ,.„„,,,;„„ i|,,„s. ].a,..e .,„. ha,,,;;!' 

;"!"■'■ ^"" '''I'"-'"- '" l<"P I'alances which th,.- :;,,.,,. 
.a e a,e lar«e c„o„j,h to yid.I a over anil ahove 
the expense ol niakinf. the cilleclions 

sv'!u",',;or""T,'''r "'"'■'' """''' '■""" "''"'-'>• >■•■""< » 

■ ' ' '", '■"'""•'" ' ""■>• H,eeks i, „, sue anncr 

as <ilx e,„,.„s air ,„>u collcct.,1 Ihn.ujfh the cic-,ri„„ 

;..;.-, ,i> w i i,^^.,, ;i(i,)j)ti.,i. 

It was pru,,„.,..| „, H,„,,„ „,^„ ,„,^, ,^^^^^, ^j^^ ^^^^ ^^^^ 




{■(.llcctiii.t,^ for the city, tlius avoiditi^v a large omnimt 
(if (liiplicatioii of work and hoUlin.u- the country l)aiiks 
to stricter terms than conii)etiiig city banks could do 
iii(livi(hials. This was the Suflolk hank system, applied 
to check collections. The scheme failed mainly because 
the banks were unwilling to give any one bank .the ad- 
vantage which such a position would bring, nor to give 
;my one bank the o[)portunity to learn so much about 
its affairs as the collection of its items would give it. 

To avoid these dilKculties it was projjosed to charter 
a new natiotial bank for the ])urpose. Init the law forbids 
national banks to hold stock in other }»anks. 

Schemes for dividing the country uj) into districts 
with a clearing house for each district are impracticable 
because settlements could not be made on the same day 
and it would be necessary for each member to keep 
funds on deposit in the clearing city to pay balances 
against them, rurthermore, the pro rata expense would 
he considerable whereas now the country l)anks pay 
nothing for getting their collections made while they get 
fees for collecting items on other banks in their vicinity 
or even on themselves. 

;}(;(■>. l^iifflisJi iiiitJiod of couuinj coJIi'ctinns.—Vuach 
i'aiik in London receives during the day a large numl)er 
if ehecks upon country bankers. I'pnu these checks 
the name of the London agent is printed. K\ try clear- 
ing banker in London is the agent for one or more 
countrv banks. So when the country clerks of each 
bank get such checks from the cashiers, correspondence 
department and other som-ces. they proceed to arrange 
them lor clearing as they do town checks, sorting them 
and ])utting them in j)ackages according to the London 
ugencies at which they are payable. No cre(ht is given 
iii the clearing house for these country checks on the day 

2. 11 



on wlnrh tl.ey are delivered. Tlie aniounts are sin.piv 
.settle<l !,y the deliverino. clerks and the receivin^r dcrk; 
an<l then the items are taken t., the respeetive hank, 
whenee they are sent hy „,ai| the same eve..i„u- to the 
conntry l,anks hy whom they are pavahlc. If these 
cheeks, reaehu.^- their destination, are fo.n.d to he all 
n^l.t, they are crechted to the account of the London 
;-urnt who is advised: h.,t if any of then, are not all 
n^ht, either fron: insufheient funds or irre-ular endorse- 
ment or any other cause, sueli irreuuhir cheeks are re- 
turned direct to the hanker whose crossing thev hear 
All country checks not returned or advised hv thJ morn- 
ing oi the third day are assumed f Se paid! and credit 
is accordmn^ly «iven for them in the clearm- of that 
day and the amount is settled for, alon.- with those 
advised T,aid, in the final halance. All countrv checks 
lield hy London hankers, returned unpaid, must he re- 
turned mto the hands of the clerk representino- the deliv- 
ering hank hy V>:liO on the third day, and thev are simply 
( educted from the total of the countrv cl/ecks on the 
day of settlement. 


;«#"■ ■ T 


Di.l'OSITS AM) Dl.l'OSriwRS 

'.W7- General di po.siis. l)i'|)()sits are of tw^ kinds, 
-( iicral and special. Cieneral deposits are always moiuv 
(ir the ri^Iit to receive money. They ei-eate between 
the bank and the customer the rehitioii of debtoi- and 
creditor. The rclati(Mi is pecuhar in that tlie bank not 
iiiily contracts to pay the debt on demand (unless the 
deposit is a time deposit) but also agrees to pay to the 
order of the depositor any sums within the total amount 
dl' the deposit, and if it i'ails to do so it may l)e sued 
in damaii'es bv the depositor. The baid< mav satisfy the 
depositor by the payment of le<jial tender, no matter 
liy what form of money the debt was created or how 
iiiiieh the le^'al tender may have depreciated. Tho lethal 
ttiider acts during the Civil War period were more im- 
portant to l)anks than any other class in the community, 
tliese acts ])ermittin<4' the banks to pay their depositors 
(kj)reciated ])aper money, even though the depositor 
ii;id deposited ^old. At that time it was the custom 
;niion<;' the banks to oj)en special ^old accounts all the 
payments on which should be made in fjold. 

.'}(i8. Speeial depomts. — A special deposit may consist 

of anythino- of value left with the bank for safe keej)in^. 

The relation between the baid< and the de])ositor in such 

a case is that of bailee and l)ailor. The title to the deposit 

does not pass to the bank as in the case of a <>'eneral 

iji riosit. but v(^sts. !!! ib.c <l'.'i)()sit(>r. 'i'he bank is ludd to 
i' -■■- ----- -- ' ' I --- --- 

use only ordinary care in protecting it and if it is stolen 





Avitliout iicnlioviKT on [hv part of the l);ink, the owner 
imist hear the loss. Tlie hanker must return to the de- 
positor the ivleiitieal thino- deixisited. If the hank ac- 
cepts a eousideratiou I'or keepiiio' tlie deposit, it is held 
l)y law to exercise ^n-eater care. 

.'J(ii). Safct// deposit rowZ/.v.— IJecausc the banker was 
the oidy husiiiess man in the smaller j)laces, possessin<r 
a sale, it was formerly the custom for him to receive tlu 
valuables of customers for safe keeping'. Nowadays the 
banks derive a profit from the function whieh was 
formerly a source of ^reat aimoyance to them, and tlu y 
liave estal)lished safety deposit vaults the l)oxes of which 
are rented by the year. These a aults are not only profit- 
able on account of the rentals they earn but also because 
they act as a feeder to tlie bank. Many people who 
will not trust the bank with their money will rent a box. 
This hrin<,^s them into touch with the officials of the 
bank, and as a rule whatever suspicion they had grad- 
ually disai)j)ears, so that ultimatelv thev become regular 
depositors either in the savincrs or commercial depart- 
ment, especially if the bank pays interest on deposits. 
:J70. Inducements to depositors. — We learned in the 
I)recedin^- chapter that a cash deposit enables the bank 
to loan credit from three to six times Its amount. It 
is quite possible for a bank to make 1.5 to 20 per cent on 
the (le|)osits left with it. Hence there is nrreat conijieti- 
tion aiiion^r banks for tleposit accounts which are likely 
to he fairly permanent. In return for the use of the 
general dejxisit which is so protitalile, banks liave been 
led by e()m})etition amon^ themselves to offer many 
valuable services to the depositor. Among these are the 

(a) Checks. — It pays the checks of the depositor, 
taking the risk of their being genuine and that the money 



is paid to tlif i)frs()n dcsiniiatrd hy \\\v depositor or 
Ills order. liis serxiee is ol nrcat \aliic to the dej)ositor 
as it saves Iiiiii the iiiconvenieiiec ami the expense of 
iiiai<iii^" eash payments. 

(h) Collections. — The hank eolleets the cheeks and 
;ill iitlier items of credit for the depositor, often at eon- 
siderahle ex[)ense. It offers tlie depositor a cheap 
and easy way to collect accounts due hy draw iiiii' si^^'ht 
drafts on his dehtor and collectin<'' them throu<>!i his 
hank. Since the ^'row th of the custom of sending- local 
checks in making- small payments to city houses, such 
for exami)le as the one dollar subscription to magazines, 
the associated hanks in several of the larger cities have 
hi en compelled to estahlish a unilorm fee ('or collecting 
cwi-of-town checks, the rate usually heinif |'^- of 1 
per cent, with a mininiuni diarize of 10 cents per cheek. 

(c) Safctif.—'Vhe bank relieves the depositor of the 
risk of caring for his money. 

(d) Loans. — The bank usually feels under obliya- 
til 111 to loan to a depositor on more advantaffcous 
terms and usually on less rif^id requirements than to 
non-depositors. It can do so because it is moie or less 
a((]naintcd with the affairs of the depositor and can 
accej)t personal credit when other parties would i-e(jiiire 
collateral security. The greatest advantage, however, 
(•->nies in times of panic when funds are needed most 
and when all the banks are refusing to loan to others 
than their dc])ositors. 

(e) Interest on balances. — Sometimes the })anks 
p.iy interest on the daily balances. This practice \sas 
111 innovation of the trust companies and was due to the 
fact that the (le])osits in the banking department of 
the earlier trust com})anies were practically time de- 
posits. \Vhen the character (d' the deposits gradually 




MCNKV AM) H.\M\l\(i 



3", ?^ 


c'li;m^c(l the CMstdin still prevailed, imich to the vexation 
ol' the national hanks. 

(f) lucrcdsi's credit.- 'Vlic hankin^r coni^eetion f'l-e- 
(juently inereases the en (lit of the husiness man. A 
^ood Imnkinn- reCerenee is Creijiiently ol' <^reat advantaii'c 
in husiness. and the l.>anks must he eonstantly on tlieii- 
^nanl against persons who use their eonnectiiin with the 
hank to uain unmerited eredit. 

.'J71. Dillicultic.s ill cstahli.sliing a ncx hank. — It is 
very dilllenlt to estahlish a new liank in a communitv 
already sujjplied. If the old hanks are not willin/jf to 
aceoinmodate their eustomers freelv, and if thev chariie 
for making- eolleetions or refuse to loan exeept on oner- 
ous terms as to i-ate and security, a new institution nia\ 
attract many depositors hy superior inducements, pai- 
tieularly hy paying interest on deposits. Too man\ 
concessions, on the other hand, may cause the new hank 
to lose credit for soundness; it may he inclined to taki 
great risks in loaning in order to reco\er the amounts 
j)aid out as infei-est to depositois and in the expensi\e 
sei'vices performed for them. There usually is no dilli- 
culty in finding horrowtrs for tiie funds of the ru u 
hank; in e\ery community thire aic always husiness nn ii 
of unsound methods who ha\e hecii refused credit In 
the old hanks and who wilcotne the a|)pearancc of ;i 
new \nii\k. hoping to estal)lish relations with it. They 
try to place the hank under ohligations hy opcnitig di- 
posit accounts. 

'A7'2. f'tiliic of (I hdiiJ.iii^' coiiiiiclioii. — Many well cs- 
lahlished hanks ari' eiiahled to hold thi'ir depositors w itli 
out paying interest on di])nsits against the competilioii 
ot' the trust companies hecause they offer the (lcp()sit(n- 

i)i;iM)si'i>^ AM) Di.i'osn ()i{s 


ii.iiiicly. credit in limr of need. When m panic comes 
Mri'l (\eii str()n<i- business concerns .ire in (lan<Jer ol' 
liankruptcy tlirou^lt ieiiij)ora!'y need of I'und.s. the op- 
portunity of the liank to render svr\ ice is very ^reat. 
A suiall loan at the |)rnper time may count i'or moi'c 
than interest on (hposlts t'oi- many yeai-s. Depositoi-s 
Kinain !o\al to ohl consei'x atiw hanks, knowint'' 
the hanks \\i!l i)r()hai)ly ha\e a chance, sometime, to 
rendei' reciprocal sei'\ ice. Ilouexcr, ;is business (on- 
ccriis ^rou richei- and less dependent upon hank credit 
for existence this inducement will lose its force. 

:}7-J. Kiliiif/ chi'clc.s (111(1 (Ivdfls. The ])raeticc of 
"kiting" is ;i st.Mrce of urcat annoyance to hanks. It 
^ practiced hy depositoi's who wish to s^ain the use of 
liiiids for a siioi't time without payment of intensl. It 
;■- |i!issilile to accomplisji this hi'cause of the custom of 
Kinks of nix iiiu' credit imme(hat(l\- upon deposit I'oi' 
cliicks and drafts. e\ in though the\- ai'e drawn on dis- 
tant citii's. Kitinn' re<]uires tlu' collusion of two pai'tits 
located some distance .apai't. It he most easily done 
hctwecii branches of the same concein. 

ISIX. Miiliod (>l " hiliin/. ' To illustrati' the practice 
I< I Us assinnc that a <lepositor in \ew ^'or|•. draws a 
siiilit draft or deposits a chick reccixed from :i fon- 
fcdcrale in San I'laneiseo. Tin- bank will permit the 
Niw ^ oik d( j)(>sitor to check .-i^ainst the cr< dit even 
IIm'U^Ji IIk b.'uik wdl not i'eali/.( die proceeds of the 
check oi draft within nii'' or two weeks. It will riiiiiire 
at least a wvrk lor the cheek or dr.ift fct reach San I'lan- 
'•isco and be prcseiitid to the ennhderate lor pa\nient. 

'irip.itino- the .irri\al of tin bMI auamst him the con- 
Icdcrate will provide credit at his bank by dej)ositin^ 
tl 'I'C a (ir.'ift or ebick on .1 liilnl <'< m !'< / 1< rO. iwiliiii.^- 




in New Oilcans. Thus Iwo oi- three {X'l'sons ?niiy have 
the use ol' eoiisiderahk sums ol' money lt)r some time 
without payment ol' inteiist. 

.'}7.). 7V//c /o (hjK)siU(l clicchs, etc. — Tlie title to paper 
deposited in a hank '.'ten heeomes an imi)ortant (pies- 
tion. It is a rule of law tliat it' the items de})osite(l in 
a hank arc for colleetion and not for credit on the re<r- 
ular account. tl;c title docs not pass to the hank hut 
remains in the dcpositoi until the proceeds have arrived 
at the hank. In tliis ease Mic l)ank is simj)ly the a^eiit 
<)!' the oufier, and the [jt'occeds oi" the collection are 
trust I'nnds whieh. ii' they can he traced, must be re- 
turned t.» the ownei' in spite of insolvency of the parties 
holdiu/^' thetn. I f the paper is endorsed 'for collection" 
there is no douht as to the owmrship. hut when it is 
endorsed in full or in hlank the owtici'shii) dei)ends en- 
tirely upon the a^^rei'inent hetween the depositor and 
the hank. I f no agreement has heen made the hv holds 
that the deposit is for credit and that the hank actpiires 
title. If the hank should fail the depositor must take 
1ms chanc( s with tin otlnr dep(»sitoi-s. hut if the agree- 
ment has heeti that the items diposiS.d arc for collec- 
tion. Ol il' they ha\e iieeii endorsed plainK' "for col- 
Kction. " liie (l( p(»it(ir is a j)ref( i-red creditor and is j)aid 
hef(.re all ollk r depositois. 

I iiless the item is endorsed *'|"or collection" or they 
iia\e notice otherwise, innocent thii'd parties who enn- 
sider the item llu propeiiy of tlii' hank and seize it to 
pay any <le')ts of the haiik then ha\int,^ it. cannot hold 
to lh( iiile longer. The law on this point was clearly 
hud down in ilii' ease of I)o|)i)tlt \. National hank ot' 
the Hepuhlic' 

:i ../ .;. . .;. 

' No. I, Niiliiiiiiil Hiiiik Cas«*s, 




y have 
le time 

I paper 
: (pus- 
ited in 

ik Init 

:)n are 

lie ri- 
ii it is 
ids cii- 
)r ami 
■ holds 
it talxL 

)]• col- 
is [)ai<l 

r thty I 

I) con- "k 


L' it to I 

t hol<l I 
•Icarly g, 
jik I 




Dopj)cit deposited w ith his l)ank a check endorsed in 
hiank for collection. The hank endorsed the cheek "for 

(oll( ction to the credit of Hank," ( insei-tin^' its own 

name ) , and sent it to the National Hank of the Uepublie. 
Dnppelt's hank failed the next day owin^' a considerable 
amount *;> the National Hank of the Repuhlic. The 
lalttr sei/.ed the jjroceeds of the check after it had been 
(•('liK'ted in order to satisfy the debt due it. Dojjpelt 
surd il-c National Hank of tlie Kei)ublie lor the funds, 
ilaimin;^ that his own l)ank had accjuired no title to 
thi (luck. Heoardlcss of the agreement between hini- 
M If and his l)ank. Doppelt could not recovei- because the 
National Hank of the Uepublie had no notice, nor could 
it have leaiMied IVorn the endorsement of l)opi)elt's bank, 
that it was not the owner of the check. The law per- 
mitted the National Hank of the He|)ublic to regard 
IIh check as bein^v the j)roj)erty of Doppclt's bank. 

Ml. Acccpihi^ deposits xchcu insolvent is criminal. — - 

lie icceipt of deposits by an insolvent bank is clearly 

a Iraud and the ollicers who take (iei)osits are guilty 

nf eriininal oll'ense. ])unishable by inii)i'isonnient. In 

iMti\ icling an otlicei- of a bank of this cjiarge it is neces- 

^al y io j)rovi' thai he knew the bank to be insolvent when 

lie rec( i\cd the d(|)osit. 'I'he InsoUtiicy of a bank is a 

\ery diflicult inattci' to deti'rniine sonictinies, l)ecause it 

li peiids upon tlu' \ahir ol' the loans and discounts in 

its assets. While the olliceis may know that sonic of 

'" lo.uis are not first class and !iia\ not be paid promptly 

\<t they may beliexc them to l)c good ultimately. 

•MTH. Dri.tx'vr niciscd fr>iii! r( sjio'isihiUt // aflrr riui- 
sdiKihlc tinw. The drawei- of a i-Ji. ck is always liable 
foi' tli<' ultimate payment in case tin liank should fail 
iielore it IS cashed. Iloutver, in ordi r to pniiect tiie 

drawer ol cheeks, tin 

a\\ reiiiiiii 


a clieelv imis 

t be 




})rf.s«')ik-(l to tlif hank foi- j)iiymciit witliin a reasniialjlc 
time, othcTuisr tlir lioMrr of the duck must assume tin- 
lisk of the f'aihu-e of the hank. 

.•J7!K Local hdiihs. \u the ease of a loeal l)ank the 
courts liave held that a irasonahle time means until tin- 
close of the husiness day t'ollowino- the ddiveiy of the 
check. 11" the payee should endorse it to another party 
on the second day and the endorsee should hold it still an- 
other day hefore presenting- it. the hank iailino- in tlic 
meantime, the ori<>inal drawer would he released and the 
payee he eomixlled to reimhurse the jiolder or endorsee, 
hecause the lattir had jjresented it for })ayment within a 
reasonahle time after reeeivitin' it. In the ease of ehecks 
drawn on hanks outside the city in . hic-h the drawer 
resides, the cheek must he forwarded on its way hefore 
the close (d' the next husiness day in order to hold die 
drawei- responsihie. 

.'{HO. Hohhr of a clitch c(ui iiol .sue haul-. Tn nearly 
ever\ state a hank on which a check is di-awn is under 
no le;4al ohlioalion lo tin- holder to pay or accept it. 
win Ihei' the maker's funds ai-e sullicient for this. purpose 
or not. Of ronrsc if the hank has ;iceepte(l the check 
hy (■( ililicatioii. then I in holder has ;i claim against tin 
''••'"'-• I I' ;i '•■■'Ilk should (hvlinc without a \aii.l rtasdn 
to j)ay a check dr.iwii on a siitlicic nt fund helon^in..' Id 
its de|)ositor the iiisl it iit ion would he liahle for wliate\tr 
injury the d( positor sustaiiie.l. 1 'or example, should 
a liaiik decliiK to |»ay ,i cluck sii|)])osiiio the makt'r's 
depMsil was iiisiillicicnt when in truth it was ample, the 
institution w<Mild he lialile for the eonsi .jnenees of thi^, 
(hshononn.L;- his order. (\(ii thoii-h its condm't was 
'"iinded on the mistaken c.ilciilat ion of a hookkicper. 
.'ihl. ill , (icdiidii. i ii( iepositor iias tlie pri\ iltM.c ,,r 
^t<'ppil!,:^ paNiiHiil on a check. ;uid the hank will he 


i)i:iH)siTs AM) Di'.rosri'ou* 

;}] 1 

nk \hv 
itil t!ic 

of tllC 
■ ])ai1y 
till ati- 

iii till' 
nd tJK' 
ithiii a 
id the 

lialil'' for the anioutit if it pays the clitrk in spite of the 

stop order. 

TIr' death of a dei)ositor works a rrvoeatioii of all 
tile eheeks not yet paid just as soon as the bank receives 
notice of liis death. 

882. Insufficient funds.— If tlie credit account of tlie 
(K[)ositnr is insuthcient to pay the full amount of the 
cheek, the hank lias no ri^ht to pay a part of the sum 
with the funds on hand. On one occasion when a l)ank 
refused to pay a check where the funds to the credit 
of the dejxisitor were insufhcient. the holder of the check, 
r. arin^' that if there was delay he mi^ht not receive any- 
thin;; on account of the emharrassment of the drawer, 
(Kposited to the account of the drawer a sum suiHcient 
t(. cover the amount of the check. Thereupon the hank 
!iad no ri^'ht to refuse payment. 

;{S:}. Forgeries. — The l)ank is presumed to know the 
sitiiiatures of its depositors and it cannot pay a forced 
cluck and charge the account of tlie depositor with the 
aiuoimt of the check. The principal excejjtion to this 
rule is in the case of a check so neoliocnlly dr-iwn that 
an alteration is easily made. The hank that pays a 
I'orii-ed check cannot recover the money from the iiino- 
( . lit pavee. This seems a hard rule as both are imioeciit. 
but as ^rreater vigilance on tlie i)art of the iiank nii.uht 
have discovered the for^a-ry it must i)e held respousilile. 
'Mi. Post-dating:- '^oun-Uuivs cheeks are post-date.!, 
that is, bear a later date than the one on which tluy are 
written. The object of this is to ..''tain ddav in mak- 
ing- payment, tlie drawer simply desMin^i' time in uliieh 
to have the money in the bank's possession on tlu' date 
specified. The bank that pays an ;ilt(ic>l post-dated 
(litik before its due date i-aiinoi elnck tlie amount 



a^-ainst the drawer. In no ease can a eliei'k ] 






11. tnn. spenhec he c.|,a,...l to tlu- d.aue.-'s account. 
.iHo Srf-of.-^lhv rdation iHtuccM the har.k and 

<n-s.o,.,s that of dehto.. and creditor: therefore either 
Pa.ty has the r.o-ht to set off his ,leht to the other uith 
;n.y e am, he n.ay have against him or it. For instance 
.1 A has a deposit of $100 in a har.k. the hank is his 
'l^-I'tor lor that sun,: hut if the hank holds an ur.sccurc,' 
jnul matured note against A for ^.50 the deht of the 
f'ar.k to A is only $oO-the diiferencc hetneen the credits 
and debits. 

.•iS<J. fncn a dcpoKifor fails, Hs uoW not hcin^ se- 
cured.- 1 h,s point is of consi.lerahle conse(,uencc when 
one or another of the parties have heeome insolvent. U 
the depositor fails owing the hank on an unsecured note 
whether n.atured or unn.atund, the hank can sei/e the 
Jlqx's.t to satisfy the note unless somehodv has a prior 

^en upon itfor instance, an attachment: ;.r in Ilhnois. 
South Carohna. Kentucky. Nebraska, or Texas when 
a cheek ..peratcs as an assignment of so much of the 
<lci'"s.t a che<k holder, after he presented the check 

won ,1 have a chum superior to that of the ha.ik. Simr 
n.solven.y caused all unmature<l obligations of the in- 
M.lvcnl p,.,.son In b,.,nnu. at onee ,lue au.l pavable. the 
'^o.kc.uld apply a deposit on such a note. If the note 
.as secunly the hank must (irst satisfy the note from 
the securit\-. 

;|.sr. Advantage In ././W.r.-If the bank should 

:'-''''••'; I'--'';;'' n.ay s, loir his note to the bank with 
Ins d.pos.t. Ih,. receiver cannot, of eourse. enforce 

;""',^'"","" ""•""'*■ "'"'''" ".aturesbu! the depositor 
I'.-'s Ins elaim against Ih.. bank u in never the note is 
IMVsented to hi.n. The nveiver cumo, avo|<| this set- 
;:;\;-,"V;7^'*'" ■'"'*■ '"aninnoeenl I hinl party, for th,. 

I'act that the not 

V \^as piiic|ias/(| I 

I oil! a reeeixtr 





lit notice of irregularity. If a note after maturity was 
iR<4()tiate(l by one bank to aiiotber and the first bank 
t'aikd hol(lin<r a deposit of the maker of the note, tlie 
maker eould use his deposit to off-set the note, because 
tilt' second bank was not a bona fide holder and took the 
note sul)ject to all equities between the maker and the 
tiist bank. 

:\HH. Set-off maki's failure'^ appear tcnrsc. — Since a 
larne portion of the loans of a bank are made to de- 
[iMsitors, whenever a bank fails a considerable part of 
tlie assets are canceled l)y an equal amount of liabilities 
in the shape of (!e])osits. Depositors who are also bor- 
louirs are really in the position of ])referred creditors 
for their (lej)osits and they oain at the ex])ense of de- 
pnsitors who ai'e not also borrowers. Therefore, in a 
1 ank faihu-e where a ;>() per cent dividend is paid to de- 
[Misitors. the failure is not so bad as this fi<,nn-e indicates, 
Inr a large number of depositors may also have been bor- 
ii'\\(rs and lunc lost little or nothing, 

:{H!>. Illustration.— A bank witii Sr^l, 000.000 loans and 
si,()()(M)()0 deposit liabilities fails. 1 f half the loans are 
iiffsft by deposits there remain .%')()0,000 of loans with 
\\!iieli to pay .%")00,000 deposits. Supi)ose the loans 
nali/.e M) pvv eeiit of their face value w hen licjuidated, 
< n- would then be .$2.50,000 to be distributed to depos- 


le (!' positors who 

itnis. or a ,•)() ptT ci.,,! di\ idcnd. I ( 

\^' If also borrowers had not been allowed to offset their 


Itligalions with their deposits, the assets collected would 
iuive been !i<7.') 0,000. which would have l)een distributed 
iitiiong all the depositors having claims of .$1,000,000; 
lliat is. each depositor would have received a 7.'> per cent 

ili\ i(l<-nil 

,. 1., 




le percentage of divide nds indicates. 

•*''0. Form of note. — Some l)anks use a form of note 



similar to the f'ollouin^- in which the horrowcr specificailv 
agrees to permit the hank to transfer t(; itself in ease 
of his insolvency any deposit credit or other form of 

I'l V A N STO S , III 


""'■'■ '''''•■ ITDinist. to pay to fhf order of 


With interest at IHr';:,:;." ,,;; ani„;„. aft.r ;.•.■.■.•.• at tiTX 

of sa„l H,..„k, X ,1m.. n....iv...l. I„ ....s,. of the insolvency of the 
>m.le,s,p„..l any In.leMedne.s due fron, the lejral hol.ler hereof to 
tl"' M.ulerMfrn,.<l n.ay he appropriated and applied hereon at anv time 
as well hetore us after the maturity hereof. 




3!n. Tico qualities iicccs.sar// to the ir iking of a 
htinlicr. — The succcssl'ul l)ankc'r who lias llie entire le- 
spoiisihiHty ol' his bank upon his own shouhlers must pos- 
sess two <|uahHeati()ns ahiiost opposite in eluiraeter. 
I'ikU'I- former eoiuhtions eonservatism was the distin- 
«4uishin<4- (luahtyof a good hanker, hut with keen compe- 
tition in the business he must add to eonservatism in 
planting loans, ao^^'ressiveness in seeui-ing deposits. In 
a lar<4e bank the two functions can be specialized in dif- 
I't'ient men. The point of view of the ot!icial who makes 
the loans should be, first, to avoid losses and, second, to 
make money: in these good judgment is more to be de- 
sired than enterprise. 

Mr. William I^aw, vice-])resident of tlie Central Na- 
tional Kank of Philadeli)hia, iti an un])ublishe(l address, 
Ims made a fourfold classification of bank boi-rowers. 

'■V.)2. luvcstiiioit /oc/;/. v.- First. inve>iment borrowers 

pai-ties who borrow to invest the funds of the bank 
in certain secvnities or property which they Mish to carry 
with a view of reselling at a profit, or of holding until 
I'liiids can be accumulated to i)ay for the purchase, or 
iif enabling the holder to gain certain control or infiu- 
I iKT. or of otherwise accomi)lishing some object external 
to the transaction. Such are the loans ordinarily 
granted brokers, investment bankers, and market opera- 
tors, lliese loans can be readily irali/rd upon m piw- 
[)ortion to the coincrtibility or salaltility of the collateral; 







tlKit ,.s to say. uudvv normal conditions such a borrower 
^^ 'II pay ns loan at one hank by ..||in«- the seenrl^ies 
pledged there or by borro\vin<.. t'rom another bank 

-'m. Cuu'litinns under tchlch the,, arc fraud hnukin->- 
/o...--Loans oi' this eharaeter, if they are obli^atio,;; 
of aetive and capable n.en, and especially if pavabl. on 
clenumd and secure.l by well-,hstribute<l and properly 
n.av^uu.d collaterals possessing a broad market, are an 
JNcellent nnestn.ent for a portio.i of the of a 
•mnk. Ilouever. when money is rednndant such loans 
at tunes y.eld a lower rate of interest return than the 
■•ate paid by banks in reserve and ce.itral reserve cities 
"Pon tne daily balances of their out-of-t..wn correspond- 
ents. In recent years the rates upon such loans have 
rano-ed from ll . to 2 per cent for several consecutive 
"lonths. In times of o-reat financial stringency reali- 
^t,on upon such loans is often excee.lin^ly d'iffic.dt. 
Ihe bank having loans secured by a large hnj of certain 
securities may lu-sitate to force their sale, fearing to 
break the market and thus reduce the market value of 
similar securities on other loans or injure the market 
price of securities belonging to their friends and business 
associates: but we are compelled to recognize the fact 
that under our system of a bond-secured, non-elastic 
currency, with its Mell-known central reserve city and 
reserve city features, call-loans upon stock exchange 
collateral affonl a reasonably safe and exceedingly con- 
venient method of util,/ing that portion of the loanable 
funds of an aetive bank in a financial center which is not 
employed m eanng for the rciuiiemenls of traders and 

.304. Industrial /w;/.9.— Second, automatic or seasonal 
"orrowers. Hy these terms it is intended to deseril)e the 
operations of manufaelnrers. meiehants. farmers, dro 



virs. and otlicr like IjorrowtTs who r(.(iuire lt'in])orai-y 
acroniinodatioii (liiriii<^ a ])eri()(l of product ion, transi)or- 
tation. distribution, oi- collfction. To illustrate: A 
(■i»ii\frter oi' cotton o'oods must jjay the coniinission iner- 
rliant or manufacturer for his raw material, for instance, 
i^iay ^oods, witliin ten days after purchase. The ])roc- 
iss of l)leachin^\ dyeing-, and finishing- may consume 
sixty (hiys; the p.-ocess of (hstrihution amon;^' and col- 
kciion from the dry <4()0(ls wholesalers who purchase 
the finished ])roduet will re(|uirc at least sixty days more. 
l"i;n(ls loaned a borrower of this (lescrii)tion should be 
automatically returned with the completion of the trans- 
action. Or a company operatin<if grain elevators in 
Minneapolis ships wheat in carload lots to a Philadel- 
phia grain exporter, asking its local bank to discouii-t 
tlie bill of lading draft created by the transaction. The 
completion of this ])urchase by the sale of the sterling 
yrain bill automatically returns to the bank the money 
l)()rrowed. From the standpoint of a commercial banker 
loans of this character constitute the ideal bank credit. 
Hanks are to be en\ied when a large part of their funds 
are utilized by local dealers engaged in })roducing, 
marketing, and distributing the great staples that the 
people consume, as food, clothing, heat, and light. A 
liank so located will continue its usual business whether 
or not the. _' is a ])anic on Wall Street, whether or not 
tlic financial leaders are hurryiiig to Washington, 
whether or not there are eager buyers for life's light 

A favorite form of loans of this sort are the re-dis- 
lounts of other banks, especially if the bornnving banks 
■ire located in sections where seasonal borrowing is the 
usual rule and are, therefore, themselves seasonal or 
temporary borrowers. The risk involved is small and 




M<»^|;^ AM) 1{.\\KI\(; 


I>';"nr,i.s of rr-.lis.-ont.ts .•..•<■ .•,,,! to .rn.ain on cmlit 
"'fl' "'^' l»",l,no- hank in n.nd, lar.vr proportion than 
arc the proc-nls of or.hnary loans. A hank usualiv 
I'orrous to unrvnsv its rosc-r\es: a firm usualiv horrows 
to pay out the proceeds. 

rUv ahovc- mentioned two classes are considercl most 
(ic'siraolc loans: the two f'ollouinu. k,ss dcsirahk'. 

'•m. Capital /nans.-- -'I hinl, .-apital horroucrs. This 
Pin-ase is inlendcl to <lescrihe the borrowing- of pc,-nn- 
'H'.it capital for a business to be repaid from earnin-s 
or profits as they and the natural results 
are continuous loans aiul over-tradin^r. j.^r instance: 
Ihe president of a manuf acturin^r corporation, in con- 
structing a new plant, tfiat its cost exceeds the 
<'a],ital subscribed by tl.e stockiiolders. He borrows the 
necessary money by issuin- notes which are disouinted 
by a friendly bank. This loan can be extinouished onlv 
by borrowing' elsewhere, by continuous operation at ', 
j)roht, or by the sale of the plant. 

J|!)r,. Capita! ,houhl come from stock and hornJ mv/r.v 
— Ihe Meakness of this position would (,uickK be made 
manifest should manufacturing operitions cease All 
eapably manaoed banks discoura-e such loans in a,n 
substantial measure unless conditions are uiiusuallv i'l- 
vorable for continue.l hioh earnino.s uhicli can I.; an- 
pliul to reducing steadily such a loan within a reasonable ( apita! for re.iuirements of this character shoul.l 
be j)rovided by additional subscriptions .,f stockholders 
nr by sales of bond issues. That is to sav, ^he funds 
■slunild be held in the form of permanent or I- n.r Unu 
I'ornnvmo- at the option of the borrower throui>iri>onds 
secured b\- mortuaiic. 

Thi:, idea is eoi.e.sely exprcsseti by the advertisement 
ot ;i prominent Chicago bank: "C\.nservativ, bankln<^ 


LOANS or liu: i?.\.\k 


.oiisists ill caring' for many iiitciTsts, while (•a])itali/iii^f 
iioiK'.' Till' statciiK'iit of a sti'on<^ly or^aiii/.rd inaim- 
f;ictinMn<^' corporation or firm itidicatt's <|uicl<Iy cotivcrt- 
ililc assets ahmidaiitly siitliciciit to j)rotec't all (|uic'k 
li;il)ilitit'S. ()♦' c'oiirsf. from the staiulpoidt of the maii- 
iir,i(tni-ei- enju"a<4'e(l in a highly profitable line of work, 
till tciiiptatioii is allui'in<j' to endure for a pe;-iod the 
saerifices, hnff'etin^s, and annoyances of earryin<4' wlmt 
is termed a plant debt, knowing- that he w ill thereby ])e 
enabled to maintain ])ermanently a low eapitali/ation 
and tlnis render the task of dividend earning li^-hter for 
all time to come wlien the plant debt shall once have been 
extinguished out of earnin<;s. 

;}!)7. Mort^ni^e loans. — l-'oui-th, lon<4- time or perma- 
[icnt borrowei-s on mort<>'a<^e. To this class ])el(;n^ the 
li.ildeis of improved and j)roducti\e central real estate 
ill till' larger cities. Tiiou<4'h these loans command low 
rates by reason of the stable vahn of the security, na- 
ti i[ial banks are ])rohil)ited from takint*- them directly, 
except to secure a ilebt pre\ iously e\istin<i', and are 
ciiticised severely for taking' them •ndir*'ctly. These 
Idaiis are gencally })laced with corporations controlling 
trust or j)erniancnt fujids, scch as life and tire insurance 
cMii,j)anies, savings banks, and trust companies. T'he 
ih i4iee to w'licli these loans are encouraged by our laws 
ami the case Mith which money can be borrowed in round 
amounts u[)on improved central rea' estate in onr larg-i 
cities, ])ossibly affect the advance in real estate \alues 
as dii-ectly as the iticrease in population and wealth. 
Uuildinu' and loan associations affoi'd the most eifective 
]»lai» for handling small real estate loans. In this elassi- 
ticatioii ma\' be included, for some reasons, the bomls 
constituting preferred liens upon high class railroad 
ami traction propci'ties. l?ut their ready coin ertibiiit 



renders tlicni also 



ptahle as a hank invcstnicrjt. and 
K-y arc tavo.yd l,y the national hankino- svsten, in that 
t"^' 'lile re^rardn.o- ,xcrss loans is not applied to then. 

'm. Loans reported (u the comptroller. The f„|- 
cnv.nn- elass.fication is nse.l hy the Comptroller of the 
Currency n>. the reports re,,uired of national hanks 
Comparison ,s ma.le with the statements eovev' 
I)eiiod of tti, vears: 

i-uii>- a 



.'JIM). Demand loans have i»ctrast(L— The first class 
irpresents the demand loans of all the national banks. 
It will he noted that these unsecured demand loans have 
increased over 4. per cent in ten years. 

The second class are demand loans secured by stocks 
and bonds as collateral. There is an increase projxjr- 
tionately in this form of loans between 1897 and ]!)()<;. 
The year IJKXJ was one of great speculation in the stock 
markets, and the increase in this item represents the 
^n-owth of speculation on the margins. About one- 
third of these loans a'-e reported by the New ^^)rk banks 
aioiie. In 1897 these loans fell oH" proportionately to 
others. prob{iJ)ly ,„i account of the hcjuidatinn of' the 
stock markets which had taken place during the summer, 
the margin traders having l)cen sold out and their stocks 
going into the hands of holders who could purcliasc 
then, outrigh 

too. Donhlr-namc pa per. —The next item rei)resents 
trade i)aper discounted at the banks. The decrease of 
H per cent in ten years indicates the changing naturt' of 
l);ink loans. The commercial jjaper |)laeed through 
cninmercial pa|Kr houses, which are di scribed later, is 
single-name paper. It is now the custom of the largest 
Ik'iiscs not to take notes from their customers but to 
l'"in.w on their own credit. This tendency is more ap- 
I'li-e-if in the cities than in the coimtry as a whole. 
I'linnighont the country there lias luen ;"ui ab-.olutt iti- 
erease in two-name pap(>r of nearly 100 per cent, while 
"i«' increase n this class of loans held t,y \cn- York 
haiiks has !)• ^n not more than .'JO per <-eti». 

••01. Single-name and brokers' paper.— 'Vhv amount 
••'■ Mugh -name pap.r lu Id by tin banks almost <!..,,!, I,.] 


le commercial |)ap(!- houses. 

1'-. iiHiK .iting UK gr(i\s (II (i| 


VII— .M 





The last classification represents time loans on mort- 
gages or other security. Since the law prohibits the 
national banks from loaiiing on mortgages the colJateral 
back of these loans is probably to a large extent personal 
securities and warehouse receipts. 

Jielow are rej)ro(luce(l two forms of notes in use geii- 
crallv bv banks: 








nfter datr. for value nc.iviil proiiiiso to j),iv 

to thr onirr of l!ic SIWIK HANK Ol' I':VA\.ST()\, 


Doi IMI'^. 


; Mt the STA'I-F-: IVWK OF I'A AXSTON, with interest nt the rale 

of |)er cent [ler aiiniiiii from inilil paid. 

And to secure the |)aytiien of said anioinit henliv 

iiuthori,^e irrevo<'al)ly any attorney of any (.'oiirl of record to aii- 

I'car for in --nch {'ourt, in term time or vacation, at any 

time hercaftiT, anil lonfess a JMd^'ment without process in favor 
of tlie liohler of this note, for such anionnt as mav appear 'o In' 

Mliiiaid thereon, tom'lher \y\\\\ costs and '. dollar- altor- 

ni'y's fees, and to waive ;uid releax- all errors uhich inav .nterveiw ; 
in any such proeeedin^rs, and consent to iiinnediate execntion upon 

(such judjrtnent ; hereby rat ifyinj? and confinuinp all that 

said attorney mav do liy virtue h,i> tl. 



(Ml. I. \ rhU \I. NOTE 

% I'.V \ VSTOS, II I 

ON DFM ANI"), i\^\fr lintr pr'imitv to pnj/ to thf order nf Ihi 

STATI, HANK <)!• KNANSTON, nl >lt n/fire. 

... Dot I *R', 

for value rerrired, vith inlirml of Ihv rote of p,r iml fur 

nnnum. nl'trr dotp. horynq dfjiofitnl irith noid fhink o> rnllnlrrol nrriinlii 
for thf imymi-nl 'if thm orul nriu of/iT Ivilnhtu nr linhilitii'n t>f Ibf uuilfi 
Bxyned to mid /{(ink hi'rituf'.rr or hrreoftfr ront lorl, il , thf folloiniKf pyoji- 
trty, riz. : 

thf markft ralu* of which m noir f If thf Honk or its attigni 





■ I, I'l Ihiil thai niii<l I iilliihriil .iii-iiri/i/ i.i of liss value tlrni nborr ntntfd. rtr 
'n>i if fit'id s(i-ur'ilii .iltall dirlinf i;i vnliir. nr the liobilitii of the uiider- 
M /(((>/ /') siiiil ISdiikx III- itn <is.iliiii!< flidll be lit mil/ time merenKed, xaid Ihiuk 
or i/." ii.isifiim null/ rail for additional .teriinti/ fatigfaetorq to the Imldir 
luniif. and falhire to fnnii.ih the aanie fhiill make this note at once due and 
jHiiiahle. Th( undi rsiani d hinbii ijires xaid Hank, its attorneu or its 
afxiiins, full poirir to mil snul ndlalerat or aiii/ pari thirinf, vithnut notire 
or drniand. at fuiblir or jirirate sale, in ease said riillateral shall be found 
nf less value than idtore stall d. or in ense aiiii of said rullateral shall decline 
ill value, or in easi ndditinnal secnrili/, sat isfartoni to Ihr holder hereof, shall 
nut he funiishid upon call as above providid. or in case this note or am/ 
olhir liahilitii of the undersiiim d to said /lank shall not be paid at ma- 
tiirili/, and if such sale shall be public or at Broker's Hoard, the holder 
heriiif mail piircha.fe at such sale. In case of sm h sale the proceeds, after 
puinnint of the costs and i.rpiiisis coiintctid with siud cnllateral, and the 
sale and deliver;) thereof mail be ajiplied upon ami liabilitii of the tinder- 
tiiliifd to the holder hen of. irhetlier due or not, and the surplus, if ami. shall 
be paid to the iindersifiiii d . Iiis or their assiiins; but if the proceeds of such 
title rhiill not paii in full tin liabihtiis of the iindrrsnined to the holder 
hrriiif. the balance of such liabihtiis shall bimnie at once due and paij- 
iible and biar inlinst ai the rale of si n n jii r ciiit pi r annum from the 
lime of such sale. In case of ami i .nhaniir . or adililioii to the collaliral 
iitiiive ninnid. the provisions hiriof shall i.rliiid to such niw or additional 
ciilliiti lal. In case of the insolvinci/ nf Ihr iindi rsiijned, am/ indibti dm ss 
due from till liiial holder hereof to the undi rsuini d mail he appropriated 
iiiiil iipplii d liiriioi at ami time, as in II bi fore as after maturitii hereof. 

No ' ". 


KC_'. J lid gillie It f note- In the jud/^ineiit note tiic 
si^iiitr autliori/.t's the bank tliroiit^ji its attonu v to ap- 
pear in any court and ^tt jiid^Micnt in the amount of 
the noti' without the trouhjc and i'\j)ens(.' oC pro\in^ 
ilic ( xistencc of the drht or ^ivinix the si^'^nei- the i-i<,^ht 
til (1< iVnd iiiiiis(ir a<>ainst the ,)ud^inent. This I'oriii of 
iiiilc enahles the hank to hecoir'e a pid/^iiient ert^htor 
in case the signer is threatined with insolvency and thus 
t(i |)laee itscll' iji a jjrel'erred position in collecting' the 

K>.'{. Colldtrnil iinlc. '|'h( coliatei'a! note is the ordi- 
n.iiy noti rei|uiri(i of hoi rowers who pled/i^e collateral 
to SI cure the debt. It will he noted that the collateral 
deposited secures not oidy this deht hut an\' other (h ht 
that the si^iu r owes to Ihr hank. Tlu' hank has the 


•till i 

'11(11^ I tl I « tl I M I 

fnihue to deposit such collaleial makes the note due at 





once. Tlie bank does not liavc to wait until the matur- 
ity of tlie note to proeeed a<rai»ist the debtor. Further- 
more, if additional eollateral is not fortlicoming the 
bank has the ri^lit to sell the collateral at public or 
pri\ate sale and is evrn permitted to ])uy it in itself if 
it cares to do so. It the sale of the collateral should 
fail to cover the indebtedness the balance is still an obli- 
gation against the delator. If the si^nier should become 
insolvent the bank is a })referrcd creditor and may seize 
the collateial. 

These pn)\ isions, which seen so drastic, are necessarv 
in order that the bank may )rotect itself in times of 
falling values. The l)anks making collateral loans usii 
allv depend almost entirely upon the collateral and very 
little upon the /jjeneral credit of the borrower. There 
have been numerous cases. j)"\\ l\ er. t(^ show that a bank 
is not always safe in relyin;^' u|)on the value of liie 
collateral. Forced securities have been used to secun 
loans, the t'ori^ers de])en(lin<;' upon the carelessness of 
the bank in not scr>itini/.in^' the secui'ities as carefully 
as if they were purchasing" them. 

M)i. A'/.s/.' /// colhitcrdl h. ins. — A few years a^o a new 
stock ol' the Railway K(|uipuient Company apj)eare(! 
on the cuib market in New ^'ork. Heiuf^ jn the hands 
of the promoters of the company the stock was easily 
l)id up to a very hi^di price by means of "wash sales" 
that is, the promoters buying" and sellin<4' the stock 
an\on^' themselves. After the public had become accus 
tomed to seeing- the (luolations o!" f!ie stock in the daiK 
ncws-papv'rs ilie j)rnmoters wci ! to other cities an : 
opened deposit accounts with the banks. IIa\ in^ estaii 
lished their credit tluy persuaded the banks to a'-cept tin- 
stock as eollateral with a liberal margin. When the eon 
federates had l)()rrowed as much as thev could the bank- 

LOANS or Tin: uank 


ig the 
)lic or 
self if ! 
n ohli- 


V seize 

• a new 


lies" - 


V daily 
:s and 
; estali- 

■|)t tlll^ ;| 

lie coii- 
' bank^ 


were one day surprised and chagrinetl to find that the 
piiee of the stock on the curb market had fallen to 
almost nothing and that the collateral, which was the 
(iidy secui'ity i'or the loan, was almost worthless. 

'l"he great bulk oi' collateral loans in Wall Street are 
call or demand loans. Wiien the lender, usually a bank 
(ir tiiist company, calls the loan the borrower must pay 
it or his collateral is sold to satisfy the debt. The rates 
for call money depend upon demand and suj)ply. The 
yieatest market for it is the New ^'ork Stock Kxchange 
where it is offered by brokers just like a stock. When 
it is plentiful, call rates range from 1 to 3 })er cent, 
and money is easy; from (J to 8 j)er cent is firm, and when 
it soar beyond that rate money is stringent. In times 
of ))anic the rate has gone above 100 per cent. 

lO.) l\siiri/ lares. — Any rate of interest higher than 
that fixed by law is usurious. I low then can New \'ork 
hankers and money brokers charge 40 or 80 per cent 
foi- call money? 

Hefore explainijig how this is possible let us see just 
uliat is meant by the legal and maximum rates of inter- 
est as fixed by statute in most states. There is a very 
wide misconception of what is meant l)y the legal rate. 
Contrary to the usual impression it is not always the 
highest rate that can be charged for borrowed money. 
Instead, it is. for example, the rate that the court would 
iii,])ose if a judgment to collect an account "with inter- 
(st" wei'c entered. If the li gal rate in the state where 
'lie judgiiirnt was entered hap|)ene(l to be <i per cent. 

Uie drCcndani would lia\e to pay p< r i-enl. 'I'lie max- 
!uinin legal late is the highest rate tlurt cui be charged 
I'll money, a?id any rate above the maximum is usury. 
In some states, as for example in \ew ^'ork and 
I't nnsylvania, the legal and maxnnum rates are the same 




If J 

~0 pw cent; in Alaluinui hotli rates are 8 per cent; 
in liiinois the le^ral rate is .5 per cent and the niaximuin' 
rate 7 per cent; in Kansas (> ptr cent and 10 j)er cent 
^i| respectively; in Indiana (! per cent is the legal rate and 

8 per cent the niaxiniuin rate. 

400. Call loans (■.r<';///;/(y/.— Althongh the niaxiniuin 
rate in \e\v \-(,rk State is per cent, the ^Vall Street 
liankers can charge any rate of interest lor call loans 
by reason ol' a sectir)n of the state hankino' law which 
says: 'Tpon advances of* money repayable on demand 
to an amount lu-t less than five thousand dollars made 
ui)on warehouse rcceijits, hills of ladino-, certificates of 
stock or dej)osit. bonds and other ne<>;otia')lc instruments 
pledoed as collateral seciirit> for such repayment, and 
any bank or individual banker may receive or contract 
to receive and collect as compensation for making such 
advance ann sum to he a^iral upon in writing 
l>y the parties to such transactions." Thus the banke'i- 
can charge any late for call money for sums of $.5,000 
and moie that the borrower is willing to pay. With a 
tmie loan a loan made for a spccitied period, as ninety 
(lays— the rate cannot i)e higher than the maximum rate. 
Most people beliexf that a call loan is for one or two 
days only. Some call loans run forty days or even mori . 
The interest on it changes with th tiuctuations in call 
money rates; the interest on a time loan remains the 
same during the life of the loan. 

■KIT. Loans on ojmi 'oook accounts. Soiuv bankers 
loan funds to business men on the security of open book 
accounts of their custonu rs or on insiaiiment contracts. 
This business is strongly discounten.tnced b\- the mon- 
conservative banks. classify bankers who cML^a^v 
ni it with pawnhrokers. Hankers who do this business 
claim that it is exactly the same as ilie old business ol 



discounting trade paper. Tliev argue tliat as trade 
paper is now no longer given by customers to the same 
ixtent as formerly, the merchants have none of it to dis- 
count at their banks and therefore it is permissible for 
tiiini to borrow on the funds due them from customers, 
although these are not in the form of notes. Conserva- 
tive bankers on the other hand say that utider present 
conditions of banking c()mi)etilion any !)usiness man 
can liorrow on his general en it all the bank funds he is 
I iititlcd to and that those merchants who can get funds 
(iiily by hypothecating and assigning tlieir book accounts 
aic undeserving of any bank credit at all. 

408. Providing tcmporarij capital. — The financial 
manager of a business is concerned principally with 
liiidging over the interval between the ])urchase of ma- 
tt rials, etc., and the realization of the value of the out- 
put ol" the industry. The value ol' all the materials 
and stock represents capital wliich must be contributed 
by someone. If materials can In- bought on credit, the 
scllci- is the one who has provided that capital for a short 
time, tliough he may shift tjiis burden on to a bank by 
discounting a note taken in payment f( '• the materials. 
The l)uyer of the materials may thus jiartially escape 
Wiv burden of providing temporary capital. On the 
other hand his own customers — the purchasers of liis 
linished product — may put upon him the necessity of 
finnishing caj)ital to them by demanding terms of from 
thiily days to six months. In most cases the business 
man will find he is able to shift less of a burden upon 
concerns from whom he buys than that he is compelled 
to bear on behalf of his own customers. When coUec- 
tloiic ;ir!' s](!w e\t!'a burtieu i< corresi'on.ibnjrlv ui- 

The task of the financial manager, therefore, is to 



^^et Ihrouul, il,(. assisfancc of banks the use of capital 
not nmk'd by its owners. Banks act as agents between 
the owners and the nsers of capital. They are always 
ready to furnish capital to any one, provided the bor- 
rower can oive satisfactory security for repayment. 
The secin-ity offered to a bank may be either the gen- 
eral credit of the firm, l)ased ui)on its reputation for 
prompt payment: the possession of property above its 
liabihties: or the maintenance of a certain deposit balance 
at the bank, Jn case these are not sufficient, cai)ital may 
be granted on cohateral — some form of property hy- 
pothecated to the bank. 




LOANS a(;ainst (c)[. lateral 

400. Collateral for hank loans.~The form of collat- 
eral most easily handled is no doubt stocks and bonds 
extensively dealt in on the Stoek Exchange and which 
are marketable on a moment's notice. Heal estate and 
other forms of permanently invested cai)ital are bad 
eollateral for a bank because of the difficulty of realizing 
ui)()n them quickly. The third ^reat class of property 
uhieli may be used for collateral is merchandise and ma- 
terials representing the investment of that form of cap- 
ital which it is the le^^-itimate function of banks to 
])n)vi(le. If the calculations of the owner are not amiss, 
tills pro])erty will be j)repared for the market and sold 
u itliln the near future, so that it embodies the l)est (|ual- 
ily in a collateral security in that it will be licjuidated 
tiaturally and thus provide funds with which to repay 
the debt. 

HO. Merchandise as collateral. — The difficulties met 
with in tlie use of this most natural form of collateral 
lor bank loans have considerably hindered its emj)loy- 
inent as such. Merchandise and materials cat mot be 
deHvered to the l)ank as in the case of stocks and bonds, 
if they are left in the possession of the borrower they 
may disappear, or substitution may be made, or they 
may deteriorate through ne<^iect. 'i'hese risks can be 

u third i)arty, who acts as trustee for all concerned and 




wlio is re<,uiml by law to ccni'orni to certain rule 
whidi make fraud and loss inipcssihle. 

411. Advantages of good xairrh,,i<s},tg krus.—M „ 
to the interest of both tlie banks a.u^. tiie borrowers that 
the warehousing^ system should be so re^mlated that 
loans can be neootiated on warehoused merchandise as 
easily and safely as possible. In a ^n-eat number o; 
cases of financial difficulty on the i)art of merchants 
or manufacturers, the source of the trouble lies in 'e 
investment of too niuch capital in merchandise or n,a- 
terials which cannot be sold (juickly without loss because 
of adverse market conditions. The ^oods bu\e value 
but time is lecjuired to realize upon it. T?ankruptcy 
may be imminent unless the banks consent to pn>vi(le 
the temporary capital to carry the merchandise, and 
their doinu- so may depend upon the ri^k invohed in 
loanin..- upon the security of the U'e-chandise. The 
value of a warehousing system, regulated by law, is 
measured by its service in eliminating the risi attend- 
ant upon loans on merchandise. 

412. Loans on merchandise a legitimate function of 
banks.— The character of baid^ loans has changed 
greatly in recent years. There has been a marked de- 
cline in the amount of trade paper offered for discount 
and competition among banks has compelled them to 
develop new fields. 

The collateral loan is one of these, but few banks 
have been willing to acce])t anything e\cej)t stocks and 
bonds as collateral -loaning on merchandise is still 
regarded in many (juarters as a sj)tx^^ies of pawnbrokin- 
and is classed with loaning o!i book accounts. Xever- 
theless loans on niercjuuidise confor??! »ii.-.!v 



--. — ..., .>...»„»i, i,». 

banking principles, and they promote the industrial 
prosperity of the community more than any other class 



(if loans in that they give snhstantial aid to le<^itiniate 
(dinintrfu in niari^etab' goods, which is the basis of 
all l)iisiness. Anytlung which removes obstruction from 
the free passage of goods through all tlie processes 
tVoni raw material until they reach the consunier rep- 
II sents an economic gain. All other business, of what- 
t\er kind, is merely auxiliary to this fimdamental 
i.idductive acti\itv. There is no doubt that the inmie- 
(li.itc future will see a gradual elimination of the uncer- 
tairitits and risks incident to loans on merchandise and 
a (Irvtlopment of tiiis branch of banking. 

41.'J. Statement iif a bank president.— On this subject 
^i^. \;ish. former president of the Coi'ii Kxchange 
i?;iiik of New \'ork. spoke as follows at it.^ liftieth an- 
niversary baiujuet: 

The hank 1ki>, however, made two iinportnnt contributions to 
A' ■ ric:ui hankiiiii'. Prrsidont Dunham. Ijciny; familiar with the 
^ram huslness, introdu'((K inmiediatilv on takini^- otficc, tlie un- 
usual ])racti('e among ijanks of : sisting merchants to carry 
larg(' stocks of grain and iuerchaniiise in this port, by making 
I(ian^ on that i lass <)( collateral wlien represented hy the ware- 
)iiiu>e reci'ipts or bills f latling. It subjected us at the start 
ti) till' stigma of being a jiawnbroker's shop, and this stigma 
" - fi'i'elv ap})lied. But eventually the principle of advances 
I ■! Mil I'chandise «as adopted by other banks, luitii now it is well- 
iilyh universal. It has always been a distinctive jjart of our 
huMuess. Mr. Dun'.iam used to say that wheat and cotton, wool 
.•uid pork, lard and coffee were as good as gold, and he was 
rcadv to give gold to tlu man who was willing tn pledge these 
( iiiiiiiiodities as security for its payment. He, howt . rr, con- 
tiind his opcrati- ns to the great staples named, because the 
'jiiihtv aiui the price were less subject to wide variations, and 
UHS chary of general merchandise, where the differences are 
much more marki'd, and to a non-dealer somewhat deceptive. 
'J'his preferenie for the staples has not prevented us from going 





iiiio liss (li'sira! ' llruN of l)usii]oss, wIk-iv tlu' soliditv of the 
born.wcr has onf'. Awd the dNadvatitu^L's of his collatLral, and 
varifcJ mid sonut:: ;niius;tij.r lists of iiicrchuiidise have been re- 
porti'd to our (hrti'toi> i\,v their aj prova! 

41 J.. J. ate of rcarrhouNf rtccipff.—Tht ^reat ]imit;i 
tion to the use of nierclmndise as collateral is not so miu ii 
in stability of \alues of the commodities as it is the diHi- 
culty of maintaining- intacL and secure the collateral 
itself. The -levelopment of wareliousino' and the use 
of the v.arehouse receipt under such leoal reoulution as 
to ^-uard a-^-ainst fraud is gradually diminishing the 
risk of merchandise loans. 

•il5. l\iif\,rm hnc. — A valuable contribution to this 
end has been the drafting of an "Act to make uniform 
the law of warehouse receipts" l>y Uie Commission on 
Uniform State Laws in lOOO. 'J^he success of the Com- 
mission in getting its uniform law ol" negotiable instru- 
ments adopted in twenty-eight states and by the federal 
government makes it more than likely that this ju-w 
act will soon become a law in all the states. As in the 
law of negotiable instruments, the wai-eliouse recei])t 
law aims to codify existing laws as far as itossible. 
Whenever anything new is projjosed, it will invariably 
be found a step in the direction of promoting the busi- 
ness of loaning on merchandise. The passage of such 
a law in states which have not already a similar one is 
of the most vital inie'cst to merchants and manufac- 
turers as well as Itank'rs. It will jiasten the time when 
loans will be made as readily on warehouse receij)ts for 
stored goods as they are now made on stocks and bonds. 
The advantage of the warehouse recei})t is that it 

.. ....1.1. jLI - 1 . 1 ■' ' ■ • • • • 

c::.i:;ir:- i;;;; ^UOliS liesci"! iii. i.i iTi il It' i>c isoiti or pie{ig'e(i 

for u loan uf inoiiey by the mere delivery of the ware- 


Loans a(,ai\m i ollaikhai, 



Iioiisc rccci])t, tl)iis avoitliiio- the iiifoiiveiiiciR'c of an 
ncliial innoval or delivery of the property itself. In 
(itlier woids, the warehouse receipt is u sytnhol for the 
pinptrty (k'scrihed, and the dehvcry of the receipt is in 
l.iw a deli'' v of the j)ossess!on of the propei'ty. 

11<> Hinli involved iit loans oh xitirclionsc rcfcipls. — 
'fi.c danger of accepting a warehouse receipt as colhit- 
I r;d may arise from an insutlicleut or false «lescription 
if the ])roj)erty, tlie uufaithluhiess of the warehouse- 
man, who may misapproj)iMate the property coiDmitted 
to his keepinjL^; ne<i:H<,''enee in earing for it; or from 
cai'clessness in allowing- recei])ts to cireulale 'wlun the 
[iroperty hehind them may not exi.'.t oi- may f)e suh/ject 
to liens, hi all these ca^es the Iioldcr of the receipt 
iiii,L>ht lose his claim to the pi-oj)ei'ty ,'Uid would he forced 
!'i rely upon the personal responsihility of the war.'- 
Iiousema?! for re!ml)ursement of liis loss. 

417. Under tJie present laxc. — I'ndcr the ju'cscnt law 
ill most states rhe svarehouseman is responsihie as hailee 
\'<n- the safekeeping' of the <foods. lie is houiid to use 
oi'dinary diligence or sue!) care as ))rudent j)ersons usu- 
ally take of their projierty. He is not hahle for losses 
causel hy Hre, flood, insurrectioii, or ])uhlic c'cmies. 
1 1' he is guilty of no neglect he is not resj)onsil)le for 
U'oods stolen even hy liis own en)])loyes. 

Persons dejxisiting me?-ehandise with a \\arehoiise- 
inan ai'c o))li^ed to tnist to his fidelity and dili^-enc'^' in 
takiu'X due care of th.eir property, and persons dealing 
in warehouse receipts are in the same position, and must 
also trust to the accuracy of the warehouseman in de- 
scrihiti'T in the receijtt the ])roj)erty intrusted to him. 

!f tlw> ti-'i r^>n) >i ! ^i -t I Ml II mien f»t^»-/^TM'i'i 4 II 

tails to take due care of it or if he falsely or insurticicntly 





describes it in the receipt, the holder of the 

receipt nu 

lose his chiiiii to the property and mav have only 



action for (hima'j-es aiji'ainst tl 

le w arehouseni 

418. /.v,s'//r of receipts safi guarded ~ 

propose 1 1 

act dn-ows definite restrictions aronnd issuin^r of 

receijits, and makes the warehouseman cni,.inally hal)lc 
HI many -.ases. It provides tliat all liens on the goods 
must he set forth in tlic receipt, inchidinn- the rate of 
storage charges. Tiie warehouseman may not insert 
any clause absolving himself from his legal liability lor 
due care. -i)uplicate and non-tiegotiable receipts must 
be i)lainly markec' as such. 'J'he warehouseman shall 
be obliged to del.ver the goods on the receipt if the 
demand is acco?>;panied by an otfer to satisfy the ware- 
liouseman's lien, a surrender of the receipt, and an 
ackno.vledgment of delivery. The warehouseman shall 
be justified in delivering the goods to any one tendering 
the receipt iiroperly endorsed. If a thief presented a 
negoti;ib|r receii)t properly endorsed the warehouseman 
would be proU'cted if he delivered the goods innocently. 
41!). ProUctian U, holders of rceeijds. If the ware- 
houseman shall fail to take uf) and cancel a negotiabit 
recei|)t when goods are delivered, he shall be liable lor 
fadure lo deli\cr the goods to any one who j>urch;is(s 
for value in good faith such receipt, whether such pur- 
chaser ac(iuire(l title to the receij)t before or after the 
delivery of the goods by Ibis warclioiisrman. 

A warehouseman shall be liable to the boldrr of a 
receipt for damages caused by (Ik non-exislcncf of flu 
goods (V l)y till, failure of tlir g,, to correspond to 
the description there.. f ;!i the rcc. ipl at the tune of its 
issue. If, however, the goods aie descrilu'd in a 
merely by a statement that th(_\- are said to br goods of 
a ccrluin kind, or that packages containing the gooJs 



;ire said to contain goods of a cei'tain kind, or by words 
of like import, sucli statements, if trne. shall not make 
]ial)le the warehouseman issuing the receipt, although 
[lie goods are not of the kind whicii the marks or labels 
ujxrn them indicate, or of the kind they were said to 1)0 
hy the depositor. This makes the warehouseman liable 
for what he asserts only. 

4'J(). Gnnmhmcnt not allmccd. — (ioods delivered to 
a warehouseman who issues a negotiable receipt there- 
for cannot thereafter, while in prvssession of t!ie ware- 
houseman, he attached l)y garnishment or otherwise, or 
he levi( tl ui)on iindcr an execution, unless the receipt be 
first surrendered to the warehouseman or its negotiation 
iiijoined. In most states the })resen'i laws disallow any 
!4a!tiishment ; it was thought best i!i this act not to taivc 
s(i extreme a positi(..i but to cover the essential practical 
point by making it a condition ol' the validity of sueh 
MT/iu'c that th<- negotiation of the receijjt be enjoined 
or the document impounded. 

A |)e'-son to whom a negotial>le receipt lias been jiego- 
tiated accjuires, accoi'ding to the act, such title to the 
goods as the person negotiating it had. and also the 
direct obligation of the warehouseman to hold |)ossession 
of \iie goods for him according to the terms oj' the receipt 
;is fidly as if the warehousiiuan had eontracted directly 
with him. 

t-L'l. rciiaUi/ for iUcf^nl use of rC(rij)ts.— l\ shall be 
a cnmirtal offense for a warehouseman to issue a receipt 
for goods not actually received, or to issue a receipt 
knowing that it corrtains a false stateiudit. or to issu'- 
iliiplicate receipts not so marked, or to issue a rcceij)t 
for goods of which hi himsi !f is the ownir without stat ■ 
iiig that fact, or to dclivei- goods without canceling 
the receipt. ^\ny pi rson who deposits g(H)ds to \shich 



he has no title, or upon which there is a lien or mort- 
gage, and takes a negotiahle receipt therefor witli intent 
to deceive without (Hsclosing want of title, shall be guUty 
of a crime. 

Loans may he made on receipts under such a law wi^h 
little risk or incoinenience to the lender. If the goods 
are insured his chances of loss are practically limited to 
deterioration in the (juality or value of the goods. Sea- 
sonai)le goods in old storage, such as fruit, butter, eggs, 
poultry, etc., must l)e sold at certain seasons, lest they 
shrink in value by having to compete in the market witli 
fresh goods at cheaper prices. 

422. T rails fcr of iitir to lender. — ^lany banks preier 
not to accept recei])ts for warehoused goods as collateral 
at all but retjuire the transfer on the books of the ware- 
house to themselves, takhig a non-negotiable receipt 




!••-'*{. Evolution of the credit depart went. — Only 
witliiii recent years have credit departnients appeared in 
!lie banks. Formerly the cashier was snpposed to keep 
[Hrsonally all the credit information. However, it has 
ludi found [)referal)le l)y the banks to em|)loy a comi)e- 
t' lit credit man, whose sole business is to accumulate 
iiifiirmation on credits. In some of the lar^i^er city 
I'.inks and es))ecially in the offices of a commercial paj)er 
liniise, there are highly or^^anized systematic credit l>u- 
rciiis. which have on file every bit of information rei-ard- 
iii-i' the credit standin<r of their customers. 

Vl\. Sources of credit information. — The cliief source 
of information on credits is of course the statements of 
the customers themselves. Tntil within the last ^<.w 
\( ais it was not the custom of the banks to demand writ- 
tdi statements from customers and there are still busiticss 
JiKii who resent the re(|uest of l)anks for statements. 
As a rule, howe^er, the borrowers have found it to their 
;i(l\anta^e to vnake a full statement of their afairs to 
tliiir banker, knowing- that failure to make .such a state- 
lihnt will prejudice their credit. 

A stan(;ard form of customers' statement in use l)y 
i'links is rtproduci'd below for the |)urpose of showin^r 
till items ( !' information which the banks believe to be 
important m the n.initinn ,,f Joans. In some doubtful 
cases tlu banks may riipiire the statement to be certified 
l)y a professional ai'countaiif. 



\ 11 ii 





If ■ 

rnrm A. 





For the purpose of procuring credit from time to time with you for "iir n#un- 
tiiible paper or otherwise, we furnish the folIowinR as a true and accu; ite statf 

inent uf our tinamial condition on I'.IO, ,, which you are to consider 

:m cnntinuin^ to lie full a' d accurate until we pive you written n'tticf of chafigf. 



Tiisli on hand 

Cash in the followinB hanks 

Notes Payable Kiv.n iner 

Notes Payable lo . *iatcd to 

own banks 
iNotes Payable othcrwis.' dis- 
posed of 

Acconnia Pay.ible 

Deposits of Mr.ney with Fs 
as follows 
By $ 


. • 1 • : • 

K'olos Rec-n-ahle of cnsto 
mers (not transferred) 

Aci'ouDtB Keceivable of c\islo 
mers (not Iransferrnd) 

Niites and Accounts Receiva- 


■ ■ 

ble o' partners (not trans 

Merchandise finished (how 

valued ^ 

Merchandise unfinished (how 

valiicil ) 

Merrlianilise raw material 

By t 

By $ 

By sundry persons $ 


( how valued ) 
Land owned liy firm, used 

for this business 
BuildiiicK owned by firm, 

used for this business 
Macliinerj owned by firm, 

used for this business 

Mortcage Debt 

Chattel Mortgages 

lotal Liabilities 
Net Worth 










CONTINGENT LIABILITY: Notes Kereivable of customers Disoounted 

or Sold and not inrhided in assets enu- 
merated above 

Other conIini;ent liability 

We Have Not Pledged or Assigned any .if the abov Accounts Receiva- 
ble our .\^--i>,ned Accninls Receivable 
nni'-iint \n 

(llliiT assets nsid as collateral . 
I.NSI'RANCF: on merchandise $ buildings . .1 machin 

iTv $ Total Ihsiiranct 

HISINKSS and RESULTS: Annual Sales (nr the year ended... 

190. or from 190 to Hin . 

(.r '=^s Prcitils on Sales For the same p.riod 

K.x|ii use of Conducting Business 

Nfi Profit " '[ '■ ][ 

Other Inc. .me. including investments 

!«'. n.liined I'r.ifil 

WITHDRAW .\1.S bv 1 '.HTNERS included in expense of conduct 

ing business) fr.m 1 !»0 . . to 190.. 

HAD DFKTS f..r the pern.d I'.XI to 190 . 

SI'K'IAI. t'API'l'AI, contribuleil bv until 190., 

. 190. . 

190. . 

PEN ERA I, PARTNERS; name Ontside Net W irth 





V ACCorNTS: nli.Tr kept oilur lliaii abcive 

. iHTGAUKS; ou what as&ils a lion 

Avcrnso TKKMS on whicli we SKMj 

Arerage TKK.MS on wliic-li we ISUV 


TIMK "f YKAR wlicn Notes ami Ai-roiinls Hcipival.I.- <>i i-iistoiiiers, ['iiroIN-rtpd, 

are jjeiierally maxinnini iniiiiniiiin 

TIME OF YEAK when Stocks of Morrlinndise on hand aro cpui'rally ir.aximuin 


TIME of YKAR when Liabilities are maximum luinimum 

STATKMKNT: is it based on artual inventory.' if so, Date 

VKKll'ITATlON: have the bonks been audited by a Certilied Public- Acer.untaiit ? 

if so, Name and Date of Audit 

lU'SINES.S: what kind of business do you ronduet ! 
BOOKS: wliat kind of books do you k. cp? 

(Please si:.'n fiini name) 

^Mte Signed. ... 1 !io , , Ry 

Please Give PaMieuIars of Ivnh Parrel of Real Ksiale 


Street and 

City or town 
and state 

Title in 
name of 





'I'lic l;i\v is .still !iiK'(.itai(i toward jxi'soiis wlio make 

! iNc statoiiR'iits for the purpose of ^aiiiiii^ civdit. The 

"tniioiis failure of A. Hootli and Company of C"liiea^»'o 

ill I '••OH iiidiieed the legislature of Illinois to pass a law 

!i \'M)\) making it a eriininal offense to obtain loans 

M false or misleading- statements. TIh' jutialty for 

i'Mntrsois tint ind impiisonmei.t. 

I"_'.5. Credit <'/^'Y7/( /( v. 'I'he second .souire of informa- 

m is the credit a<4-encies. The chief credit a^^'-eneies in 

tliis country are Dun's and Hradstret fs. Concerning'' 

tli< function of 'hese a<4i'ncies one hanker has said: 

' \n\ man is unwise to base a '^.'A) credit soklv on an 


.M()m:y and banking 



agency rating or ivport, ])nt any man, business house 
or institutio;i is (loul)ly unwise who cannot get hack in 
full all that he i)ays out to the conmiercial agency, pro- 
vided lie knows lunv to use the information which he 
receives. " 

The fact that the agencies charge the same fee for 
reporting upon a credit involving .$o{),()()0 as they do 
upon a credit involving oidy $.5, makes it impossible for 
them to do n)ore than superficial work. The reports 
are obtained by reporters who are not expert credit men, 
and wlu. are reijuired furthei-more tf) report upon ten to 
fifty concerns in one day. The reporter will first try to 
get a statement iVom tlie concern under investigation, 
and then will go to the banker or local lawyer for infor- 
mation. The n)a\iinmii salary of the bulk of such ro- 
j)orters is not much abo\e '$20 per week. The business 
is very [)rofitable, in the case of Hradstreet's paying a 
])rofit of (i< ■_. per cent on its capital of if^l. .)()(),()()(). Tiic 
charge for the service of an agency is ^MH) a year. This 
sum entitles the subsei'ibcr to 100 special reports and a 
book of j'atings semi-annually. The reports are valu- 
able in suggesting points which might otherwise be over- 
looked and in tabuhiting information obtained in other 

4'2(!. Duties of credit num. — It is the business of the 
credit man to cndtivate exery possible source td' inforin;i- 
tion bearing on credits. He must consult court records 
to find suits which ha\e been filed or judgments ren- 
dered, lie must know when any of iiis cHents have 
P'corded mortgages. lie should find out the business 
alhhation of bis clients so :is to get clues as to the kind 
of business done by them. 

The credit dej):irtm(td of a I);uik affords the best op- 
porMmiiy of any de|);n-tmt nt tor the young man who 





wishes to learn tlic baiikinir business. The experienee 
())' iiettin<»' information about the business men of the 
cniiiiiiunity and abc^ut the peeuhar eonditions existing 
iii the various hues of trade, will eultivate in him the 
jMiwxr of ju(l<rment so that by actual })raetiee in the 
sulinrdinate position he may (jualify himself for the desk 
(>r an officer. This can scarcely be said of any other 
Mil';.rdinate position in a bank. 

{••-'T. Tltc commercial notc-hrohcr. — The note-broker 
is a middle-man betwcn the lending bank and the bor- 
iiiwing business man. His profession is to borrow 
iiKitiey for other people, and the need for his services 
;iii(l the amount ol' his remuneration will depend upon 
his skill in i)lacing loans and in obtaining favorable 
Iniiis from the lenders. To borrow money to the 
best advantage is an art recpiiring exj)ert knowledge 
;iii(l ability beyond that of the average business mana- 
ger, and if his borrowings ai'e large enough to make 
it worth while it is ])rotital)le for him to engage tiie 
services of the note-l)roker in this business. 

Tlic business of note-broking has changed radically 
within the last decade and is still in the process of raj)id 
lit \el(;pment. The old-fashioned broker was simply an 
;ii4rnt who. for a certain commission, placed the promis- 
soiy notes of Jiis principal at the lowest rate of discount 
ht cituld obtain. lie incurred no liability, had no occa- 
sion to employ capital of iiis own, and did not attempt 
III place the jjaper far from the locality of its inception. 

I-'JH. Clian^c in the business. — The note-bnjker on 
iniiimission !;as givcji place to the dealer in comnjercial 
paper who Iniys and sells outright the jjromissory notes 
of his clients. The !)usiiRss is practically controlled 
by seven or ei lit large lu'ms whose operatiorcs extend 
over a large part of the w hole ctninlr} . The nature of 

.'5 ki 





le business is sudi that the tejukiu/y toward central 
tion in a few sti'on^- hand 


s is inevitable beeanse of tht 

disadvantages under which the sni 

dl operator must 


r. Larne caj)itaK the eonfidc-nee of lend 



thoroun-hnoinn- and elHcient credit department wjiicli 
IS necessarily expensive, and a hir^e staff of salesmen. 
are factors against which the small broker finds it im- 
possible to conij)ete. 

In order to buy and sell paper to the best advantage 
le modern note-broker, oi- more properly the dealer in 
commercial ])aper, must have a capital ai)|)roximatimr 
5M.0()(),()()() His chents demand the money u|)()n their 
notes at once and the notes must be held several days 
before they can be lealized upon. With such a capital 
our typical dealer in commercial paper can do an annual 
business of $10().()()().0()() at an exj)ense of about 8l()0,- 
000, or one-tenth of 1 per (vnt. He can make a '^ond 
profit if he can net one-fourth of 1 per cent or even 
less mari^in on the ])aper he handles. 

4-Jl». Diiiuind and .siijjj/l// of commcrc'ud paper. — In 
times when the demand for loanable funds is <,n'eat and 
the ii.tercst rate liinh. the dealer has no difficulty in 
purchasi , first-eiass paper. He does not need to seek 
out new clients but on the contrary is kept busy market- 
in^' the pajHr of his old clients. The energies of the 
dealer are directed almost I'nlirelv to seiliiif. 'I'lu 
house w ith a well-or,i>anize(l and efficient selliim- fonv 
has a ^reat advantane over competitors. The firm here 
in mind has twenty salesmen coverin<r nearly the whole 
of the Cnited .States. Through tlicse anent< it is en- 
abled to keep informed on the money situation of everv 

The r:<te of interest in any locality is determijied by 
the demand i'or and the supply of loanable fimds. The 





forces vary from time to time with more or less reg- 
ularity. While the cotton crop is being marketed in 
the South, for instance, the demand for funds is very 
w-rtat and beyond the available supply. I>ate in the 
\ tar, when the money returns to the banks, the supply 

loanable capital may far exceed the demand and very 
low rates of interest may prevail. There is scarcely 
any locality which is not subject to these seasonal 
tluctuations as well as the accidental fluctuations which 
may occur at any time. 

\'M). Areas of high and loic rates. — The monetary 
ronditions of the whole country might be represented 
ill much the same way as the weather conditions on the 
weather map — there are areas of high money and areas 
of low money, and these "highs" and "lows" move across 
the map with more or less regularity. lieing able to 
predict the movement of the "lows," the expert dealer 
in commercial paper is able to take advantage of low 
interest rates wherever he finds them, while the borrower 
himself is confined to his own inmiediate locality where 
the rate most of the time may be higher than the "low" 
in some other section. 

Owing to his ability to sell paper at a lower rate of 
discount than the borrower himself, the dealer may re- 
alize a haiulsome profit v,hile discounting at the same 
late as the local banks. As far as the rate is concerned, 
the borrower may just as well patronize the dealer as 
the banks. There are, however, four additional hiduce- 
nients which the dealer may ofi'er. 

r.n. Discount offer by dealer. — (1) It is an almost 
universal rule of the banks to reijuire that the l)orrower 
shall maintain a dej)osit balance e([ual to at least 20 per 
cent of his loan. This means that the borrower can 
actually use but $80 out of every $100 Ijorrowed froui 





the bank. If he has ho 

rrowed at the rate of .5 per cent 

or everv avail- 

ititcrest. lie aetiially pays over (5 per eeiit f 

able $100. U Ik- sohj liis paper to a dealer hJ would 

realize at once the full face value of the 1 .an. 

(•i) liy selling his paper thr()u<.h a dealer he k 
his credit at his hank nt^.^n -itwi iii.;.>i,v.,:..,„i „.. ^i. 


)ank open and urnnipan-ed, so mat iii 
case of enierfrency he has this resource to fall hack upon. 

(3) }W estahlishinfr relations witli a dealer he creates 
a broader market for his paper and may reasonahlv 
expect the dealer tt) favor him as an old eustomer when 
otherwise he could not get accommodation, perhaps he- 
cause of a stringent money market or because his credit 
showing was not satisfactory to those with wiiom lie had 
no previous dealings. 

(4) Tlie dealer has facilities for floating a much 
larger loan than any bank could handle, thus relievin^r 
a large borrower of the necessity of negotiating with 
several i)arties. 

Dealers in commercial paper do not endorse the notes 
they sell, nor do th«^y assume any liability except for 
their genuineness. The notes are made payable to the 
maker so that they may be negotiated without endorse- 
ment. The success of a dealer is so closely dependent 
uj)on his reputation for handling only good jjaper that 
he will use every effort to i)rotect the holder against 
loss; so there is practically little risk in buying his paper. 
In of a failure the dealer will take charge of the 
claims of hi.s cu.stomers, and as this usually makes him 
the largest creditor he will Ik- able to jjrevent undue 
loss by reason of unskillful handling ol' assets of the 
failed firm. 

4.'J2. Cmlits.— The ])est guarantee against loss fur- 
nished by the dealer is the close attention given by the 
credit department to every note sold. The most effi- 



iKiit credit (k'partmt'iits in the eoiuitry are those main- 
tained hy the dealers in coniniereial paper. \o cHent 
is takt n until his tinaneial conthtion has \\ ithstood a most 
search iii<:;" investi<4ation. A statement is always re- 
([uired and must he revised at fretjuent intervals. Kach 
salesman has copies of these statements to show to pros- 
pect ive customers. Fnder orihnary circumstances no 
[Kijxr will l)e l)ou<»ht l)y the dealer uidess the statement 
of the maker shows (luick assets (cash, mcrchindise, 
ami hills reeeivahle) of at least twice the value of the 
liahilities. The credit department may he regarded as 
tlif most vital part of the husiness of dealinii" in com- 
niercial [)aper. Few hanks outside the largest cities 
lia\e ci'cdit facilities and they are disposed to rely more 
aiiii more on the information furnished hy th(3 note 
dealer as experience proves its reliahility to them. 

l-:i."{. Si:::(' of notes. — 'I'he notes sold are usually di- 
vided into amounts of $5,000 each and rarely run longer 
than six months, tiie average heing about ninety days. 
I'lices are (juoted in per cent, the higher the rate of dis- 
cmint tl:^' lower the price of the note. For example, 
a note for .$.'5,000 due in six months without interest may 
It' bought by the dealer for (J per cent, which means that 
it would yield to the borrower $.5. 000 less the interest 
nn Sj.OOO at per cent for six months ($1.)0) . The net 
yidd would be, therefore, $.5,000 minus $1.50, or $4,8.50. 
It' the dealer sold it immediately to a bank at .5' j per 
c(nt for six months (or whate\er time remained until 
tlic note was due in case the dealer had held it for a 
while), this would amount to $4,802. ,30 ($.5,000 less 
'*i;<7..50) . The profit to the dealer would be the differ- 
ence between $4,8()2..50 and $4,8.50. or $T2..50. 

The business of dealing in commercial paper and dis- 
t'ihutinu- it tlirougliout the comitrv on a large scale 






U^yB 12.5 








'ft', ^ f>T.* Moir ''.t»M!t 





is so recent and is developing so rapidly that the total 
effect on the banking situation has not been fully worked 
out. An irievitable tendency will be to equalize the 
rate of inerest throu','Out the country; the smallest 
country bank will have loaning facilities almost as good 
as the largest city bank. There will be no inducement 
for it to deposit its surplus funds in New York at 1 or 
2 per cent interest when it can buy first class paper 
at much higher rates. On the other hand, business 
firms who are large borrowers will have a market for 
their paper as wide as the whole Tnited States and will 
thus be emancipated i'nmi l(K'al restrictions. 





I'M. CJiaractcrisfics of carl// bankhi;i(. -Tht early 
111 loiv of l)aiikiiiir ill the I'nited States is for the most 
part a history of tlie issue of eireulatintr notes. Prior 
t(r the national hank aet of 1805 whieh greatly restricted 
noti- issue, the deposit eiu'reney re])resented hut a small 
jMiiportion of the eireulatin^ medium of the country 
and hence occupied a relatively unimj)ortant place in 
tlic business of hankin<4'. l^articular attention must he 
^i\en. therefore, in a discussion of hanking prior to 
I (St;,"), to the success and failure of the various plans for 
issuing notes. 

V.l'). licldtioiis •iciih govern mciit. — Another function 
111' early hanking, however, was to facilitate fiscal op- 
nations of hoth the federal and state governments. 
Although this has continued to he a hanking func- 
tiiiii to the |)resent day, its early history plairdy shows 
that it is not a safe one, however eHicient it may 
s(irn; and there is a marked t'-ndency toward the com- 
pete dnort'cnient of hanking fVom financing govern- 
III! nt expenditures. 'iMiis di\-orcement has already 
taken ))lace in the opeiations of the stales, and remains 
iti the operafiotis of the federal government oidy in 
the requiiement that hank notes he secured hy a 
(i( posit of govermuent honds with the Tn-asury. a re- 
(luireincnt which creates a fictitious deman<l for lK)nds 
and so lowers the interest rate that there is practicallv 
11(1 demand for them except from the hanks. In this 



:\roNi:v and bankin(; 


way it is still a fiuiction of l)aiikiiig- to finance govt'ni- 
iiunt loans. 

-t.'JC. m.storical periods. — Tlie history of })anking in 
the Tnited States may he divided into lour periods: (1) 
First l)ank of the Tnited Slates; (2) Second Hank of 
the rin"ted States: (.*}) state hankino-, and (4) national 
l)ankifi<r. In j)oint of time these periods are not at 
all distinct l»ecatise they overlap, hut there was a period 
in which each was the most im])ortant development in 

4.'}7. SoDic cavhi /;a//A.v.— Pi'ior to the estahlishment 
of the First Hank of the Fnited States several hanks 
existed which are worthy of iiote. The first one estah- 
lished was t) - Hank of North America in Fhiladelphia, 
chartered hy C'onnrtss in 17H1. It was capitalized at 
.1<40(),()00; $2.5().()()() heinn- snhscrihed hy the ^rovernment. 
C'onsiderahle donht existc<l as to the powers of Congress 
in charterin^r a hank, hence in 17H2 a charter was oh- 
tained from the State of Pennsylvania. During the 
years of tinancial chaos that followed, the hank per- 
formed an inestimahle service hy makino- large loans 
to the government for the maintenance ol' the army. 
In spite of this service the !)ank was severely attacked 
after the close of the war. and for several years had 
an extremdy j)recarious existence; it was finallv re- 
chartered hy the State of I'ennsylvania. under which 
charttr it i)ros|)ered until it hecame a national hank 
in 1H(;."). 

The Hank of .Massachusetts, with a ca|)ital of $.'J0().- 
()(M), was chartered hy the State of .Massachusetts in 
ITHI". In the samr year the Hank of New \'()rk was 
estal>lish((l hy .Mcxandei- Ilamdton. lor several years 
it ixisted as a prix.ilc l);n\k l>Mt \\ ;is fin.MHv rh.-ii-tfriM! 
hy the Icgislatun in ITIM. In hoth states an attempt 



uas made to regulate banking in the interest of the 
piihhe welfare, and as some of the problems wliich the 
Kgislature attaeked are still with us their consideration 
is interesting. 

The most im})ortant restriction dealt with the issue 
of notes. In Massachusetts it was provided that the 
outstanding loans and notes or credits and debts (ex- 
cept to depositors) should not amount to more than 
twice the paid-in capital: in \ew ^'ork, the debts of 
the bank, over and above the money then actually de- 
posited in the bank, \\ei"e not to amount to more than 
three times tile j)ai(l-in capital. Thus a distinction was 
made i)etween the lial>ility of a l)ank to its note holders 
;inil to its depositors: and there is no doubt of the ex- 
istence of a reason for this distinction at that time. 
The deposit cunency was not de\ eloped, and when bor- 
rowtrs a|)])eare(l they wanted notes which they could 
use as money. Deposits were not created, therefore, by 
loaning as they ai'c to-day, but entirely by the actual 
deposit of money, a process which did tiot in any way 
ineiease the pro|)oi-tion between the bank's demand obli- 
gations and its unmatinrd assets. The dej)osit account 
was exchanged for moniy. whereas the bank note was ex- 
<liMnged for unmatured credit. 

Kiith hanks weie prohibited from dealing in merchan- 
dise, and till- Hank ol New ^'(>lk from traiiitig in the 
stocks of tile I'nitcd States oi- any of tin states. This 
was ividently an attempt to sej)aiate banking and gov- 
ernment and. as such, was a cori'eel prinei|)le. 

4.'iH. lAunihis oil I'oiih' .v/ocA'. The liank of Massa- 
chusetts was ))rohii)ited fiom dealing iti l>ank stocks, 
.inother jjrovi^ion which was fimdamentally sound, 
lilt piai'iicc oj dealing in. or lainer ioaning on. bank 
stocks many dangers, as was am[)ly proved in 








:\:o\KY AND HA\KI\(i 



pari.c of I nor. It enables unscrupulous financiers t.. 
Ihiv one hank, deposit their stock with it as 
for a loan, and with the proceeds of the loan to purchase 
the controllino- stock in another hank. This operation 
may he continued until a nuniher of hanks are under 
the same ownership, the henetit to the Hnancier arisin^r 
from the fact that he obtains control and conserjuently 
increased credit from them all. Its dan^^er is (hie to 
the fact that any calamity which affects one bank must 
affect them all. The Hank of \ew \-ork was restricted 
from loanin,ir on real estate, or holdinrr it except foi 
l)ankino- purposes or when it came into its possession 
m settlement for debts i)reviousIy contracted. This was 
likewise a wise i)rovision and one which is found in 
practically the same form in our i)resent national bank- 
ing- law . 

4.3!). First liauk of the Vmtcd States.— Tha First 
Bank of the Tnited States was chartered by ConniTss 
in 171)1. The charter was ^ranted in spite of strony 
opposition on the i)art of those who inveif.hed against 
the tendency toward centralization of ^^overnment, hold- 
inn- also that ("on^nress was not em])owered by the Con- 
stitution (o create banks. Alexander Hamilton, then 
secretary u\' the treasury, took the <,n-ound that this 
l)ower was an im|)lied one, and his opinion prevailed. 

The bank was capitalized at 8 1 ().()()().()()(), divided into 
2.>.()()() shares of .SMH) each. Of this total ca|)ital .t2,0()().- 
000 was subscribed by the «o\ernment and paid for in 
installments. The remainder was subscribed by the 
I)ublic. one-fourth in specie and the balance in ^(nern- 
ment securities | bearing- interest i. The bank was o(,v- 
<'rned by a board of twenty-ti\ c .lireetors, not more than 
t liree-fonrt hs <!!' wh'.!.! ii.!... :.!|..;!!..!;: ('..:• -.-.. ..I....!: v , was entitled to more than thirtv votes, no 



niattrr how larg'c his hohlings, and foreig'n stockliolders 
(iiiild not \otc' by ])roxy. The bank could loan on real 
t'statc but could not hold it except for bankintr purposes. 
It could not trade in commodities, nor purchase addi- 
tiiiiial government securities. The same distinction 
lu tween notes and dej)Osits that appeared in the Massa- 
chusetts law was reco<ifni/ed, and it was provided that 
the l)ank could not become indebted, except for deposits, 
to ail amount ^reat'-r than its capital stock. The char- 
ter was to expire in twenty years. 

440. Siiccrs.s of the first hank. — The bank enjoyed 
success from its incej)tion. Hratiches were established 
at Xew York, Boston. Baltimore, Washington, Norfolk. 
Charleston, Savannah, and New Orleans. The central 
iiank with a capital of $4,700,000 was in Philadelphia. 
It ac(juired dcjHJsits of government money, receiving 
prnhably two-thirds of all money deposited in banks 
1)\ the Treasury. It paid dividends for twenty years 
at an average rate of 8 per cent. It loaned commer- 
cially, and became a jjowerful influence in establishing 
a sound currency. 

The bank's loans to the frovernment, however, the 
installments on the original ])urchase of stock, and fur- 
thir advances to be paid out of revenue, were not 
promptly paid and in 170.) had increased to over $(>,- 
(Mil). 000. There was no market for government bonds, 
hence it became necessary for the government to sell 
iK stock, which it did in 1H02. This sale had only a 
iirtiellcial effect on the bank, and it is hard to justify 
a! all the government's part ownership of it. When 
Ihe bank was organi/eil the govenunetit did not netd 
credit; it was given no control ovei" the bank except 
the right to investigate its affairs, which it seldom ex- 
t rcised. Hence the bank was not made anv more secure 





! !■ 


as a place of deposit for ,i.overnm(nt iinids; ami it had 
no surplus ou hand to luvest. If the /rovernnient hc- 
came a stockholder for the sake ol' profit, its jud^nnent 
was correct, for the dividends of 8 per cent were paid 
annually, and the stock it held was sold at a eonsiderahle 

441. Opposition to rcchartcr.—ln 1800 the stock- 
holders petitioned C\)n<.rcss for a renewal of the charter. 
and their petition was ably indorsed hv a report from 
Secretary of the Treasury Gallatin. lie reviewed the 
successful history of the hank and recommended 
Its capital he raised to' .$;j(),0()0,()()(), three-fifths of whidi 
It should he forced to lend to the ^n)vernment. Vn- 
fortunately, however, C"on<.ress failed to act and the 
question was tabled until the succeedino^ C'on^rrcss. 
\\\\vn the question a^ain arose in 1811 opposition to 
the charter was not only stron^^ hut or^ranized. 

First, those who believed in a strict construction of 
the Constitution Mere a^^ainst the bank. Second, the 
Kepublicans. now in power, denounced the hank as an 
aristocratic institution. They })ointcd out that three- 
fifths of its slock was in foreion hands. A majority 
of this was held m En<rlan(l, and a war with that countrv 
was imminent. \ot pausin^r to analv/e the reoulation"s 
which prevc.ted control of the bank bv foreign in- 
terests, or more probably for^ettiuK this regulation for 
their own p.)litical purposes, they uri-ed that in case 
of war with England the liank of the Cnited States 
woul.l lin.l itself in Kin<r (;eor^re's hands. Third, the 
state banks and the political enemies of Secretary (ial- 
latin had had time to combine a«-ainst the .^overnme it 
bank and its chami)ion. T!ie result was a vote to post- 
pone iWiiisiiun^xy iiu reneu;ti (.r iiie charter, and the 
dissolution of the bank followed imiiiediaielv. 


IHSTUUV Oi J5ANKI.\(; ;i.-,;l 

U-J. Second lianh of the ('iiitcd Stutrs.—Thc Scr- 
\)\\(\ Hank of the rnitcd States was llie result of the 
tiiiaiieial ehaos that followed the (hssolution of its pred- 
(c.ssoi-. The W'dv of ISVJ found the ^'overnuieiit 
luiids de[M)sited in state hanks, a hir<^-e nuniher of whieli 
IkhI spruno- u|i with the ])assino- of the First Hank. 
Tlicse state hanks were poorly niana^ed. and in ISl i 
s|i( cie i)aynit lit was snsjx-nded hy all hanks exeept those 
in Xew Knoland. The <i-overninent defaidted on the 
iiilerest oi' the pu})lie deht. I'ank notes eireulated only 
ii! a eonsiderahle diseount. vai'yin"^- with the reputation 
111 the issuing- hank. A o-o-, eminent hank was |)roposed 
in ISIJ. to he^iiin l)usiness undei' a suspension of s|)eeie 
|i,i\Mients. hut it was not until IHKI that the Second 
l^ink was founded. 

It was caj)itali/ed at -S'J,3.()()().0()(). one-fifth of wjiieh 
\vas suhserihed hy the <4-overnnient. Prixati' suhserij)- 
tiniis were ])ayah!e one-fourth in speeie and the halanee 
in i4()\ennnent honds. Tjiiily per cent \\as <hie at onee 
;Mid till' halanee in e(]ual installments at the end of six 
anil twelve months. The n'overmnenfs suhscription 
\^.is j)ai(l in notes, and it nceived si ,.)()0,()()() as a bonus 
!'"r i>riintin<4' the charter. 

'l'!ie chai-ter was modeled after that of ^hv First 
Hank. It was to he the depository of pul)lic funds. 
It was to he yoNerned hy t\\cnty-ti\e (hrectors. i\\c of 
\^ horn wvvv to he named hy the Presideut of the [ 'nited 
>l;itcs. Its notes were made i'ecei\al)le for ail (lel)ts 
i" the federal .u'o\ ( rmiient. l-'oreinrn stockholders 
"Mild not \()te. It was re(iuiri(i to j)ay (le])osits as 
Will as notes in specie, and a forfeiture of 12 per cent 
''.IS i)ro\ ided in i-ase it faded to do so, 

W.i. liidcmpt'uiii of tiiiics i;i spicic. This was a 
gicat step toward sound hanking. Although deposits 

VII— ,'3 




[i -■ 




Iiad ;il\vays horn iioiiiiiially payalilc in spo'cic, tlic cns- 
toiii had ^row fi up ol' paying- them in Uw iiotcfc of dlli.r 
sptrie i)ayino> hanks. If tlicsc hanks hapiH'ncd to hr 
i-einote the nnlcs circ'iiialcd at their fair vahic less the <\- 
prnsc of n'(icnipti(.n: the rcsnlt was a non-nniroi-ni vuv- 
nncy. W'liilc tiir nrw i( ouhitidn did not cniirclv pre- 
vent the eirenhition of si-wral kinds of eni'reney. il 
lielped to do so. and was a I'eeonnition of the statns ami 
possil)ilities of the de])osit system. The foi-feitiu'e ol' 
12 iKT cent in ease of suspension of speeie jjaynients 
was intended to prevent a profit hein^r made from sus- 
pension. Many of the state hanks liad heen ahle to 
pay (hvidends when they eoidd not redeem either their 
own notes or deposits e.\cej)t in the tiotes of other non- 
Sj)ecie i)ayment hanks. 

444.. Mis)ii(in(tu:c)iuiit of llic h(niJ,\ — Vudvv this char- 
ter twenty-fi\e hra.nehes were estahhshed and the hank 
soon hrouo'ht al'out resum|)tion of s[)eeie payment. 
This. howe\e!-. was the only henefit it conferred for 
the first two years of its existence, as it was shamefully 
mismanaged. Karly in its career it heoan to loan to 
stockholders on stock which was not yet fully paid for. 
Speculation in the stock foilovved. its pi'icr advancing 
and the hank Ioani!ii> its pai- value freelv. The charter 
l)ro\i(Jed that no (li\idends shoidd he |)aid on stock 
wjiich was not fully paid for. hut tiiis reouiation was 
violated. The Haltimoi-e hranch was in (lu- hands of 
nnscru]»nlous ofIice<-s who detrauded il of laro-c sums. 
Hence, up to ISin th" Seeon<l IJank ol' the Tnited 
Sta.tes was managed in such a way that the dej)o^if 
of i)uhlic funds, amountin,^' to more than -SH.OOO.UOO. 
was yreatly endanneixd. and the hank itself was a dis- 
grace to the nation. 

Jn ISli) 31r. Lano'don Cheves of South C'aj'olina wa^ 


HlSi()H\ ()1- HANKINCi 





cIctUd president of tlic hank, lie ininiediatcly set 
;i!i(Mit correct iiiL> tlic \ai-ioiis abuses that had spniiio^ up. 
r(di!ciii.<4' loans to stockhohlcrs. incrcasiiin- ivsci'\cs hy 
iiiiportalioii of sil\ci\ and rc^;idatin<4' the issue of notes. 
His administration was so husincss-Iike that tiie \nv.\k 
soon regained popuhn- confidence and j)i'ospered ^n-catlv 
the ' nsuin<4' decade. 

The constitutionality of the ^overnnienl hank was 
settled in 18U) when, tlie Su|)reiiie Court, hy C'ln( f 
.fiistice .Marshall, handed down the decisio?i that the 
istahlishnient of the hank to assist the fiscal oj)erations 
of tlu' ^(nernnicnt was an iiiij)lied ])()wer of the Con- 
stitution. It was further decided that the states had 
i\n power to tax the circulatin^r notes of the federal or of the other state hanks. ]?oth decisions were 
( xtieniely iniportar.t because a different rulin<»' on either 
would have made inii)ossil)lc not only tiie Bank of the 
( nited States hut our })resent national bankin<r system. 

1-4-,). Jackson opposed to tJic J)anJx. — When iVndrew 
.laekson became President of the United States in 1821» 
Xiiliolas Hiddle was at the head of the I)ank. The (|ues- 
1 "M of the renewal of the charter, which was not to ex- 
piit until 1S.'J(). immediately became prominent. .Jack- 
al mi was inclined to object to the bank on constitutional 
tii'ounds. and his antipathy was increased by charjies 
''i(/iioht a^fjiinst various otHcers of the bank by his ow ji 
political associates. Tlis niessa^'c to Congress in 1H2!> 
plainly showed his antij)atliy, but in IS.'JI he spoke in 
I niildiM' tone. lie \\as still kriown. how(,\ei-. as an 
opponent of the bank. In IS.'il I lenry Clay, the candi- 
date for President on the W'hi^ ticket, came out em- for .•■ rfp.fu;!! f^f tlif i'h!>rf.'>r '!'!•..-> l-.-sj-.l- -.•,■•:- 

'■•■nerally populai- and Clay was rtiemptini;- to cap- 
i.iii/.e that popularity. JJefore the election a hill pi-o- 





vidiiiir for the ixiic^val oT tin cli.'trtcr was |)assf(i 1)\ 
C'oiin'i'i'ss and \i't(H(l liy Prcsidi lit Jackson, so that tin 
(luc'stioii lu'cainc the priiu-ipal issue ol" the ciisiiiiin- caiii- 
l)aioii. TIic (11(1 of the Sccoiid Hank of the riiitdl 
Stales was in \ iew when Jackson was elected. 

Ill 1S.'{,'J the ^overnnient deposits were withdrawn 
I'roiii the hank and c-uicellation of the <4<)\ i rniiient's 
sto'-k was reciuested. To pay off this ohlii.-ation \u\\ 
stock was sold, and the hank ohtained a charter from 
the State of Pennsyh ania. It was never auain siiccess- 
t'ul. however. princi|)ally hecanse its ea])ital was too 
lar-i^e for operation in Philadelphia. It was comjjclled 
to loan lai'^e ainonnts on the stocks of \ arions companies 
which Wfi-c hein^- formed in all parts of the country. 
The panic of ] S.'JT madt many o'' these stocks worth- 
less, and the hank was forced to suspend. In IStl it 
ii<i'ain suspended, and went into li(|uidati()n. Its credits 
were paid in full hut tlie stockholders receixcd nothing. 

The history of these two hanks is interestinn-. not so 
much hecaiise of the various restrictions on loans, note 
issues, etc.. as on account of the effect of tluir intimate 
I'elatioii with and dej)endence upon the ;4'o\ criiment. 
In hoth c-ases the hanks j)erl'ormed n-reat ser\icc. The\ 
were hoth successful financially, 'i'heir failure was due 
to the fact that they hecanie iinolved in politics, as 
any hank so chartered must hicome in a countr\- where 
parties and administrations arc constantlv chan<J'in<''. 
This is tlie argument now iiru'ed ai^ainst the creation of 
any kind oremtral hank in the rnited States. 

MC. .S7^//e Ixiiihiii;^-. — liankmo- under charters ob- 
tained from the \arious states wji - of two kinds: ( li 

' ■ ■ i i •. I ■- - 1 :.-.v *. : tt -* *^ *. •* :; 4 : ; v" I Wiii j ivS, tl i i • t 

CJ) hanks in which the states themselves had an interest. 
The first class is of importance cliietly from a tecjinical 

■ ' ?-- 

HISTOUV Ol- H\\M\(, 


|iniiit ol' \ icw, j).trti<'iil;irly in I'cnard to \hv success ol' 
liic sivci'al |»l;iiis adopted for iIk iss •'' lu les; tlic 
<ic()ii(!. hicaiisc ol' IIk lael thai llie states were iiiti- 
iii.ilcly connected with their niaiia<^'enieiit. 

'l\\r early hanks oi' I'ennsy haiiia. Massachusetts, and 
N(\\ ^'o|■k ha\e already heeli nient'')lied : and i-elVrence 
has heiii made to othei' state hanks which wei'e in e\- 
isteiici' (hu'in^- the hi'e ol' the hanks of tiie ( 'nited States. 
'i lie most notahk- mo\'ement toward sound l)ankin<i' took 
jilaee in \ew iMiylainh particuhwly Hoslon. and in New 

11-7. Siif/'olL' Ixtiil: siisUin.- \\\ \ew Knyland in the 
1 ;!ily pai't oi' the centiu'y the same eonthtions prevailed 
ill reyaiil to the circidatinn' mc(hum that existed in IMiil- 
,1 hlphia ])i'ior to the estahlishment of the Second liank 
III the I 'nited States. 'I'he notes of country l)anks eom- 
jiri'-i'd a lar^e |)roj)ortion of the currency, even in the 
iiMiimercial centei's. 'i'hey circulated at a discount I)e- 
caiise ol' the expense ol" re(lem])tion. hence they (juickly 
unne the nott's of the city hanks out of circulation, and as 
they wei-e not recei\ahle at par at tli'- city l)anks while 
tlie notes of the city hanks were, the latter uatui'ally 
were presented for jjayment and the depreciated notes 
(iiiilinued to cii'culate. 

In ISIH the Suffolk Bank was incoi-jjorated in lios- 
t'ln, and it immediately endeaxoix'd to work out a ])lan 
h\ which it could make a pi-ofit I'l'om the redemption 
<ii' countiy hank notes. It otl'eivd to make itsell" an 
a.miit of redcmj)tion for the country hanks, at^reeiui^' 
to ucce|)t their notes at par |)in\ ided a dej)osit was kept 
with it to pay it foi- the trouhle. ^At first onlv a small 
Miiiiiher of hanks axailed themselves ot' the privileyr. 
I'lit the Suffolk Hank i-( taliated hy setidin;^' home for 
ivdemption the notes of all hanks \\hicii did not adopt 


lit ^ : '^ 



M()M:\ AM) HA.\K1\(; 

tlic plan. Tlif fiii.'il rrsult \\;is tli;it ))i';u'ti(';illv all IIk 
l>aiik,s ill New l\ii<4laii(l Ixcaiiif iiiciiihcrs of the Snn'nik 
svstt'iii. wliifli c'oiitiniud until tlic national Itankinu law 
of 18(;.->. 

It soon l)fcanif a cIcarinLC Iiohse for hank nok's. ainl 
jiisl as tlu' c'iiy ck'aiin^' houses oll'sct the I'i'cdits and 
(Ichits of the xai' hanks against each otiu r in siicli 
a way that only halancis ai'c j)ai(l in cash, si the Siitrojk 
l)ank canceled the hank ohlinations of all Xew Imil;- 
iand. In ISl-.l the Massachusetts law \',as ciian^'ed to 
l)ro\ idc that no hank should pay out any notes excipl 
its own, a |)i-)\ision which strengthened the Suil'iilk 
systcDi l)ecaus(.' it made necessary (luick I'cdeniption. 
All hank notes issut'd would circulati in the pockets and 
tills of the pe;)])le as lony as thei'e was actual denia.iid 
foi- them: when this demand suhsidtd th;\- would \>v 
dcpositeii in a hank, and since the\- could not ayain hr 
paid out tiny would Ik (|uickl\- I'cdeiincd at the SuHdHx 

Dufino' the yreatei- |)art of the existence of the .Suf- 
folk Hank there was no piox ision in Massai'husttts fof 
kccpiiio' a specified I'tsei'x i'. The system worked so 
well, in fact, that specie was seldom demanded. I !i 
1H.")H the leijisl.-itin'e passed a law pro\ idiiiLi' l<>ra rescr\c 
of 1.") per e(iil against hotli notes .and di posits. 'I'liev 
Were thus recoLini/.ed as liahililies of the haid<. eipial mi 
evei'y I'espi ct ; nor was thei'c any reason I'oy tlivin^' tli< 
notes ;i prefereiiee or lua I ul aiuHii^ a s|)ecial i'es( i\c I'm- 
till in under the system of ijiiick ri deiiipt ion which i\ 
isti-d. The iiotis weiT not iiileiided for general einii- 
lation hut foj- redemption w h' n tin nerd for iJu ni 
dis.ippeared. in tin same maniiei- thai our checks ;md 
drafts an- to-da\. I ndi r this s\slem tin 




■Awni^c 'ilV <'!' tlu' l);iiik note was t'oiiiul to he altoiit 
ti\ e weeks. 

44S. Xi'xc Varli sf/.stcnis. — The hanks of New ^'ork 
\\(i-e oj)erate(l alotiy- different lines. There were two 
|ilans of note issue: ( 1 ) The safety fund system and 
r2) Ihe hond deposit or tree hankin<4' system. The th'st 
is espt'cially worthy of noie hecause of the reeent pi'o- 
[I'lsal of the Demoeratie I'arty that i)ank deposits he 
niiai'anteed hy tlie o()\ fniment. a |)roposal whii-h I'ests 
nil the same hasis. 'IMie second plan is interestin<^' he- 
cause il was adopted l)v the federal <4()vernment in lH(i.') 
Ill sfcui'c the nolc issues of the national hanks. 

tH*. Sdfi'lfi fund s//.st(i)i. — The safely fund system 
was estahlishcd in 1H2'.>. Ivicii hank was rciiuired to 
cniiti-ihutc annually one-half of 1 |)er cent of its capital 
111 a s|)ec!al fund in the hands of the states until its 
ciiiiirihutions should amount to '.i per cent (d' its capital. 
( )iit (d' this fund all the dthts of failed hanks (cxc-ejjt 
lliuse to stockholders on their stock) were to he paid 
;iller the assfis of the hank had heen exhausted. In 
is;{7 the law was amended so that the notes of failed 
li.iiiks could he paid immediately. pro\ ided they did not 
aiiioimt to more than two-thirds of the money in the 
rmid. In that ycai- sc\t'ral hanks failed and their notes 
siilfcred no dcpicciat ion. After IHtd, however, the 
niiiiihcr of hanks wliicii failed was so lar<4'c that the 
safi'ty fund was Ino small to meet all theii' oliliLjations, 
li"lli notes and di posits. .Vccordiunly in 1 S l^.'{ the l.iw 
was ai^ain ariK ndi d so that the fund was made applica- 
hle otd\ to the paxiiiiiit of the nol( -, of the insoKeiil 

t.">(>. Hi, 11(1 (liposil s//.slt!li. In IH.'JS. ||owe\ei\ the 
IhiikI deposit systiin was t stahlished, and al tei" that dale 


m .i\ 

m^ ■V M 

* 9 



MoMV .\\i) i].\\KI\G 

iill i^-. hunks iiic'or[)()rat(.(l uikKt lliat plan. 'J'lus 
Mrakcjicd tlic s;it(ty I'uikI hccaiise Ihci'c wlvc iki ikw 
contrihiitions to it and Ww hur-l'Mi IVII iipoi i ronstaiitiv 
<kcrrasin<i' miiiiln!- of l)aiiks. I r. ISir. tlir new consti- 
tution of \c'\\ \ oris |)ro\ i(it(| tlial note holders wcir 
to have a lii'st litn on all tlif assets <;t' a l>ank and that 
ii) casi' of failnic slocklioldiTs wtTc to he liahk' for an 
amount c(|ual to tlicir hnhh'n^^s of stork. It furth(r 
j)r()\i{lcd tiiat no siucial t-hai-ieivs. such as those under 
v.hicli the safety fund haid<s opeialeck were to he 
^-ranted or i'.aie\\e(k Tluis the safety fund system 
^•ra(hially dwd oui with the e\i)iration of the chartei's. 
the Last (d' which (xpired in JHOO. ^\1| claims against 
it were paid in fidl. 

4.11. Mist(il,(.s i,f tin ,s//.v/. ///.— -The safety fmid s_\ s- 
tun faihd Ik cause of mistakes in ditail rather than 
tiu-ou.iih fundamental delects. The fund at tlie start 
should have hun made appiicahle oidy to the payment 
of notes. Its function was to jji'ox ide a uniform 
(au-rency which anyone mi;.iht accept without ([nestion. 
While deposits ari' e.|ual liahilitics of a hank, no one 
is ever forced to accept a di'posit in a particular hank, 
wheri'as he may hi- ofit n compelled to accept its tK.tes 
without any knowledge of tiic stahilit\ of the hank. 
It was this i-cneral acceplancc which the safetv fund 
aimed to accomplish, and it is oh\ ions that the <4u.araiitct 
of notes would have Ikcii stitlicicnt. |{y ]SU> this and 
otli(r defects had In n c(iir,(|,d hut the s\ stem had 
already rcc<'i\r(| its dtath hl.iw. Had the dcd'ccts Ih.h 
corrected carlitr it is jMohahlc that the hond deposit 
plan wnnid ni\< !• iia'-c hct ii .•idMpIrd, 

The chill' inthiences whi'/h i((l to tlu hond deposit 
law of IH.'JH ware puliiical. Cliaitf rs iiiidi r the safetv 
tund pian had hi( n Loaiited laily h\ spreial act of tlu 

IllS'lOin Oi' HANKINC 


l('uisl;iture, and tlitre was a pronounced sciitiMicnt fur 
lire hanUin'J'. The \\v\\ systiin, howcx ti'. ini^^lit lia\c 
h((ii t'stahlished nndt'i- the sal'ety t'nnd plan had that 
Ikcii workin**- smoothly. 

i.'yJ. Free hdiih'iii^- ■s//.stcin.~-'l'\H' Vwv Hankin<4' Law 
aiithoi'i/ed any })t.'i'S()n or association of persons to 
rn'ci\c circnl.-itin^' notes to l)e signed and issued as 
iiioiuy who wonhl deposit with the couijitroller the 
stocks oC the Cnited States, of the State of New N'oi'k 
III' othei' ip[)roved states, or inort<4'ages secnred hy real 
estate worth twice the amount of the moi'toaox'. 'I'his 
tl( posit of collatei-al was intended to insure the note 
lioldei' against loss. \o pro\ision for actual i-edemp- 
tioii in sj)ecie was ri'ipiired. Anyone wjio j)ossessed 
the necessary securities uii^ht enter the ha.nkinn' husi- 
iitss. and it is e\ident that many of them did. ()\cr \'M 
Ml w haidcs w(i"e orn'ani/ed before IHM). I'ailures 
i|iiickly resulted, and it was found that in many cases 
tli( securities de]tosited weit not sutlicieut to meet the 
ni)t( s. Heal estate iiiort^a^es. howe\( i \ aluahle. wi're 
iMii (|uick assets, heuce the law was tiually chanyed so 
that only the stocks of the I'nited .States and of' New 
^ iii'k were a\ailal)le for deposit. 

The notes cii-culated at first at considerahle discount 
liiil this was o\(r(dnie to a certain extt nt in ISK) hv 
.III amendmer.t to tin' law \' hich necessitated redenip- 
tmii of the notes of' itderior hanks in New ^'(ll■k and 
.\lli;ni\ at a discdimt not yreater than onedialf of i pi r 
11 lit. This, howe\(i-. >4a\c an advanlaLif to the cdiui- 
ti\ hanker hecause ol the profit he could make li\ loan- 
\iiiX his uoles at j»ai' and I'edeemnii^ them at a discoinit. 
Hence many persons iti the cities issued tlu ii' notes in 

till- rw >iiiif r\' towns I'ne nllslnl'.v^s iit tiicv/' li-iiil.^ »\ mc 

U Iv U) issue notes. 


ley had no pirmaiiint hanking 


M()M:V AM) HA\KI.\(. 



i ' 


houses, and irceivcd no deposits. In IHil lis condi- 
tioii was soniculiat bettered hy a law re({uii-iiiM- hanks 
of issue to become banks of deposit as well, but it was 
never earefully enforced. Tiic edfeet of these varimis 
ainendmenls. jiowever. and ol' the constitution of is.'ji; 
was to improve yreatly the condition of the issuing' 
banks, so that failures after 1 S.K) were infre(juent and 
in almost all cases the notes were redeemed at \rd\\ 
After 18(iU there weix- no failures which resulted in 
loss to note holdei's. 

This system was co])ie(l by Illinois. Indiana, and \Vis- 
consin but with disastrous I'esrdts. In none of tluse 
states did the system siu'vive lon^- (.nou^h to becoiiu' 
])erfecte(l. In Illinois particularly a lar<^e amount of 
the securities deposited were those of the Southern 
States, which l)e( ame valueless at the outbreak of llic 
war. The bank currency circulated at ^r'^at disccuiits. 
varyin^j!' \^idi the reputation of the issuin*^- bank, in 
1H.")7 Iherc wire 112 banks in Illinois: in 18(11 ouly 7. 
and tin nott' holders had realized less tiian 40 cents on 
the dollar. 

The oidy advaiita^^-e of this system over that of tin 
safely fund is security, which was pi'owd b\- the e\- 
|)erieMcc of New \ ovk after the list of acceptable stiu'ks 
had bi'cn i-esti'ictcd to those of the ( 'nitcd States and nl 
X( \\ \ ork. No cui'ieiicy could be nH)re secure, thai 
is. more ccriain of ultimate red( ui|)t ion. This, how 
ever, is rml tlu' only desideratum of a credit cuir-enev 
(urrt (il redi nipliou is as Important as idlimale ?-edein|> 
tion. and in Ibis the system is defective. Moreoxer, tin 
system was rii^id when the binks deposited secui'itie>> 
they were ^i\en the i i^ht |n issue so mauv notes, ami 

thl'V could not Issue .'iddlt !ori;d. '! >!!e>U> >! -. >><> >!!.'>ne!' <.<.!>:!! 
till' n( ((Is of busiuess mi^-ht be. hi oilier woi'ds. tin 

iiisroin oi ir\\KiN(, 


s\nI(Iii \v;is iiulastic, ;in nttrilmt'' wliicli aloiin' with that 
lit Mcurily it Iiaiuled down to oiii' ])r(Sfnt ('urix'iicy 
s\st(iii and against wliich most of tin attai-ks of to-day 
aif dirt'ctcd. 

[.y.i. I'!.r/)( rit iici' ill (ithcr slnh's. — Tlic liistoi-y ot' 

i,;itil\S III which the xai'ioiis states wci'c jiart ownci's was. 

ill the main, (hsastroiis. IvcntiicUx' tricil the ( xpci'iiiKiit 

\\\ ISOC and a,L!'ain in 1S2(). Ahdiama in IS'JO snh- 

Miihfd two-lii'lhs of th(- capital oi' the Hank oi' 

Aiiliama. issuini.'; bonds in i)a\iiiciit. 'I'lic oriuinal 

l^^t^i(•tions on loans \\('re ample hui tliiy wci'c con- 

-tniitly \ iojatcd. Loans wxvv tVccly made to memhers 

dl' tliL" le^islatiu'c and tlicii- fiieiids. and in ten years 

tli( disconnts increased iVom S,)()(».()0() to 

fill panic of I H.'}7 found a la!\ne auiount o|' these loans 

wMidiless. and coutidence in the notes disappeaivd. to 

Ih follov'-ed hy a period of business sta!4'natioti. In 

ist.*) the chai'ter expired and was not rencwecf Mis- 

NisMppi. Ai'kansas, 1-dorida. and Louisiana had similar 

( Apt |-ii'nces. The I iiion liank of Louisiana was estali- 

li-iM (1 in IH.'}-J with a capital of S?. (»()().(»()() laised by a 

■ i!' ot' state bonds. It failed ten yeais later, and was 

!'i|!ii\\cd by the establishment of |)ri\ale banks undei- 

M'Miid laws. Missouri's e\pcri(tice was not so calam- 

ilmis. althou/^ii the Hank of Missouri w is ne\cr a n'l'eat 

Mireess. The state's connection with it was sexcred 

11 iSdti. 

i."it-. Iiidiiiiifi (111(1 Ohio. '\'\\r Hank of hidiana was 
til' most successful. It w as ineoi pnrnted m | ,s:{ | with a 
.:ipital of SI.COO.OOO. one-lia!l' ol whii'li was siibsciibi d 
i>\ die state. It \wis ;4i\ en a uioiiupdU of banking; in the 
st.itc and the riLiiit to e^iabhsh iMancJies. |'',a<'li bi-ancli 

II II I .1 . : : 1 I .111 



i' - 


, I 1 M ' I « » 'I 

I I » I t I • I I » i v" iSSi iC » i ' i ii M V 'I \"\ (i S 

f( lrii'U'<l t<» :\\\ ;i!iiiMi!il \ -w-r as ^^Tcat as llic cMiMtil. 


M()\i:^' AM) IJANKlXd 


Kacli hi'aiK'h hauls was iT(|iiiix(j to ;icc('|it l!;c notes n| 
other hraiich<s at pai- and to iTdccni its own notes in 
specie. Dni'ino' the first years of its existence it at- 
tenii)te(l to loan on ival estate seenrity. hut the (huinrrnl 
this ensto/n \\as soon reah/ed and it was dlseont inind. 
Siihse(iuently it loaned to farnier^ on tlieii- jx I'sonal notes 
and on their ei-ops. hut the loans wvvv alwavs for shoit 
])eriods. In this way it transacted husiness on souiui 
i)ankino' pi-inciples and continued to ihrixc until ISC.-). 
when the federal tax on stale hank note issues forced 
it out of existence. 

Tile State Hank of Ohio was likewise well uianaoed 
and Jiiuhly successfid. It had a capital of s:{..'{()0.(i()(i 
and thirty-six l)ranches. Note issue was restricted to 
an ainoiHit not oreater than twice the cai)ital. and was 
I'urther safe-^uai-ded hy a safety fund of 10 ])er cent 
deposited with a hoard of eonti-ol. It passed out m 
existence with tlic expiration of its cli;!rtei- in iStlC. 

The slate l)anks. as a rule, did not fail for the sanic 
reason that caused the downfall of the two I'nitnl 
States hanks. Whih in some instances, notahly in 
Kentucky and Alal)ania. the lianks hit-anie in\(>l\cd in 
polities, their failure was u-enerally due to defects d 
or^ani/ation and niaiiayeiiient. 







I.")."). '/'//(• XdtioiKtl Bank Act. 'l\\v cstaljlislinieiit :)t' 
;iic haiikiiin- system was the result of the un- 
siitist';{ct()i'\ liiianeial coiKh'tioiis which ohtained (liii-iii<) 
tl'' ('i\ I! War. The enri'eiiev ni' the eouiitry was eoiii- 
j)ovc(i hir<^X'ly of the notes of over 1, .'>()() state hanks. 
.-! lai'yc amount of whieli was worthless and almost all 
I \Uiieh eireulated oidy at a (hseonnt wIumi it was at a 
ii^lanee from its place of redemption. In addition to 
(Ills ein-rencv troul)le the fiscal situation oi' the o-overn- 
i.'itiit was unsatisfactory. It had heen forced hecause 
cf tile ahseiiee of a market for its iionds to raisi.' moiiev 
ii\ ilie issue of leu'al tendei' notes. These notes, not 
Ik iii<i' redeemed. im])aired the credit of the ^•overnment. 
t'iiMsc(jiiently it was anxious if j)o.vsihle to strengthen 
tlir market for honds. Secretai'y Chase's plan foi- the 
c^talilishment of the national hanking' system com- 
iiK iidi'd itself hecause it would correct in a nuasiu'c hoth 
"f llicse ills, in Secretary Chase's words the pi'iiicipai 
fr;i(ui'es of the \Ai\]\ wei'c: 

I'ir^t. ,'i rifciilution of imtc^ li' ariii^ a coniiiioii i!nprr".v|<>n. iiiul 
tUlHiciif irati ( i !)v ;i I'oiiiiiKiii aiil linni \ ; ^i('(ui(l, tlir rrdrnijif inn of 
tli('s(> ii(itr> 1)\ the a^-(U'iation> aiui m^titutioii^ In \vlilch llicv niav 
ill' (Irin I rid for i>>ur. and, iliiiil. the .-ccuntx of lliat n (Icmnt ion 
liv till' pli'd^'c of 1 nitrd Statr^ stocks, and an adniuali pro- 

' ■ Mn of - MCI'K . 

In tlii- pl.m the pi oplr in llicir ordinary iiu^inc^^ uonld tind 
til'' id\anta;;(^ ol" unil'inniil \ in cnrri nc\ ; of iitnt'oi'init \ in se- 
i > . oi ciiriinai --a i ' :,;iia i i i. li riinii!:! >al fj,;ilar(i i> no>».it)ii_', 
■ lii'.v Ft"l lal i{i'-.(r\.' All in ApiKUilix. 






•l!4'.lili^t lit 

AfOMV AM) 1{.\\KI\(; 

lipnriati,,,,. ,.,|m1 uC prot.rf I,.ii fnnii Iu.>r, ii, dixT.nnts 
ami , Ncl,;,,!-,--: ulnl,. l,, fl,,. ,,,HrMt I,mi^ of flic (iovmnrn'rit. tlio 
I'"..,, I,. u,,„!,l fiiul tl,r nirllHT ;„lvanta-.vs ..j' ,-i laiir,. ,K„,an.l for 
;4n\rin,,iMit Mvunlic,,. and of incivas-.l facilities for ohtainin- 
IJk loan- n i|nirv(l liv the \^nr. 

^ t.)<;. MarLcl /.,/■ ri/ilcd ShiUs Ixnids. 'Ihv rind 
I'eahirc of fl,, piaii uas the rc(iuir(HK'nt tliat all hanks 
\vhich <l< sired t.) iiiforporate under the national name 
should huy o<,verniiient honds. (lei)osit them with the 
'i'reasury and j-eeei\ e eireulatino- notes to the amount of 
'■»<> IKT cent of their hon.l deposit. Thus these notes 
"ould l)e unirorm heeause they were all to he printed 
hy the government: and they would always he seeurc 
heeause the deposited honds wvvv pledo-ed" to tlieir re- 
•Icmi-iion. l-'urthermore. a new demand Tor n;nyvvu- 
ment honds would result whieli would greatly I'aeilitatc 
the nation s hori'owino- power, 

(•.";7. J'Jarffi liisinru ,,f I he r/e/.~This i)]an was reeoiii- 
nundid hy See-etary Chase as early as IHCI l)ut it wa , 
nut until l.S(;;j that it heeame a law. It did not. how- 
t.\cr. result in as a henetit to the national finanecs 
i:s had heen expected. 'I'here was a decided i)rejudiee 
.(.^ainst the issue of notes secured hy the deposit of 
honds. the result (.C the laHiu-e of Ihe several state svs- 
tems uhich o.H rated on that plan. Furthermore, the 
original act was del\cti\f m many respects. 'Die state 
l)anks. a majority ot which had heen e.\i)ected to incor- 
l)orate under the new law. did not do so in any lar.oc 
iiumhers: l!,<,rlore there was no great demand for gov- 
ernment !"i!|(|s. 

In IS(H the law was amended making the conditions 
of iruori)orati.,n somewhat more attractive, hut it was 
not unid ISO.-,, wlun a law was passed providinu' for a 
tax ol 1(1 per cent on ;d| notes issued hv slate hank-, 


NA'iioNAL B.\xi\i\(; s^s■l■I,^r 

it \\;i , 
. how- 

)sit of 
te svs- 

T. the 

■ state 



i \\;!s 
for ;i (•(tdvcrsioii of state into national hanks bccanie 
-1 IK lal. IJy tliis jM-oN ision all slate hanks which wished 
1(1 list' notes wei-e I'oi-ced into the new system. Thus the 
(itiiiand for honds did not eonie until the war was over 
ami tlu' neeessily of their innncdiate sale had disap- 

Tliis national hank law. its o|)erations i)erl'ected hy 
\aii<iiis anieiidments in IST-t, 1H7"). and 1H82. hecanic 
till haekhoiie of the American hankin^- system. Its 
])ni\isions. therefore, in their final form, arc worthy of 
caicl'ul attention. 

I.")H. Comptroller of tl/c ciirrciic//. — Control of the 
national ha?ikino- system was vested in a hureau of 
IIm I'nited States Treasury under the direction of the 
cniiiptroHer of the currency. It was the function of this 
(l( partment to supci'vise the issue and redemption of 
iH'trs. the orantin^' of charters, etc.. and to enforce all 
till various provisions of the law. To accom])lish this 
(11(1. examiners wire api)ointed hy the comptroller, 
uliose duty it was to examine from time to time the 
affairs of each hank in the system. These examina- 
tions were made at any time the comptroller selected, 
aii'l '.vithout i)revious notice to the hank. The examiner 
had access to all the hof)ks and accounts of the hank, 
and was rc(]uired to make a thorou^^h itnesti^ation of 
ill the loans outstanding. This examination was re- 
t'(ati(| in detail to the c()m])trollcr who called the hank 
to account for any illegal |;iactices or situations which 
might exist. Once a year the comjjtroller made a report 
(o ('f)ngrcss showing tho condition of the I'anks in detail. 
In case of the failure of a hank the comptroller ap- 
pointed a receiver. 

l.){). S It w warn of 7\(itioii(tl Bunk ./C/.— Charters 
Were granted for periods not longer than twenty vears. 





M<'M:Y AM) 15ANKl.\(i 



Si ' 

[i I ' 


Ai)])licatinii iiiust he made by not I'cwcr tlian five ))cr- 
soiis, i\itli uliosc >^()(h\ character tlu' coiiiplroUcr must 
!»(,• satisfied. T'if'ty |)er eetit of the eai)ital must Ik- j)ai(l 
ill hel'ore the hank ecuhl open. aii<l the remainder within 
six months. Tlie niinimum eapital for eities ol' .'i.ddo 
po|)uhition or hss was S'J.). ()()(»: for eities hitween .'{.Odo 
and (;.()(){). S.IO.OOO: for those hetwee.i (),()()(> and 
.-)().()()(). sioo.OOO: and for th(»se greater tlian -lO.OOO, 

IvK'h hank must ha\e a hoard oi' directors of not less 
than five memhers, eaeh of w Iioni must own ten shares 
of stock. The stockhohlers were in(h\i(hially hahle for 
all ohl'o'atioiis of the l»ank up to an amount ef]ual to 
their holding's of stock. In case of failure they could 
i»e assessed to pay de])osits. 

'I'he technical powers of national iiaiiks ha\e already 
heen considered. Hrietly they wei-e: (1) To receive 
de])osIts. (2) issue notes. ( .'} ) loan credit on personal 
security, and ( ti discount notes and other evidences of 
debt. A hank mij^ht own only such n A estate as was 
necessary for conducting its business and as came into 
its possession in settlement of ]>i'e\'iously contracted 
debts. In the latter ease it must lu- sold withiji li\'i 
years. The bank ecuhl not loan more than one-tenth of 
its ca])ital and suri)lus to one individual or cor])oration. 

Hefore a national bank could open it must deposit 
with till- Fnited States 'l'reasu>-y a cei'tain amount of 
U'overnmeiit bonds. This amount Aaricd with the ca])i- 
tall/ation of the bank, l-'oi- banks with a capital of 
$•200. ()()() or less, the j'eijuii-ement was one-!'ourth of its 
capital: for those over S-JOO.OOO it was This 
amount must be deposited re<4ardiess of whether the 
liank expected to issue notes. It was entitled, however. 
if it so desired, to receive froivi the comptroller circulat- 



= ii\ 

iim notes ccjual in ainotiiil to the pai- value of tlic df- 
|iM>ik(l l)oii(ls. These notes weie "reeeixahle at par in 
;ill parts ol' the I'nited States in payment of all taxes 
and exeises, and all other dues to the I'nited States 
( \cei)t duties on imports; and also tor all salai'ies and 
ntliir debts and demands owiny hy the I'nited States 
In individuals. e()r})orati()ns and assoeiations within the 
I iiilcd States exeept interest on tlie puhlie deht. " Tlii'y 
wn'e also le^al tender in payment ol' any debts to 
national hanks. 

ft'>(). Circiildtiii;/ notes.- — The notes nnist he redeemed 
(in demand in lawful nioney at the eounter of the issu- 
ini; i)aid<: and to fui'thei- faeilitate re(lemj)tion each hank 
\\a>> re(|uire(l to deposit witli the 'I'leasui'y an amount 
( i|iial to .) per eent of its outstanding' eireulation. When 
ndtcs were presented to the <i'oveinment they wei'e re- 
(ircined out of this fund. Ciix-ulation mi<^ht he retired 
liv i'e(leemin<i,' the notes over the hank's eountei- and 
sn:(lin<4' them to Wn'-' Miy'ton for eaneellation, or hy de- 
pDMfin^ money to . ecjual amount in the Treasury. 
Til deposited bonds were then I'edeemed. The law 
Kstiieted redem})tion. howe\ er. by pi-()vi(lin,i>- that not 
tiinie than $0.0()().()()() ol' national bank notes must be 
rt tired in any one month. The notes were subject to 
ta\afion by the ^oveiiiment. When they were secured 
liy the 2 per cent bonds, the banks nnist pay one-half of 
I per cent annually on the average circulation: when 
stciired by higher rate bonds the tax was 1 per cent 
iinnMally. 'I'jie expense of redem))t!on was also l)ornc 
lie banks. It is estimated that it amounted to about 
"'''•■{ for each $1 ()().()()() of ciiculation. 

There were in 1!M)'.). ('»,«<*:{ national banks, with a 
ti' note circulation of •S<;4H. ()!)(•. 2 10. To secure this 
*; (Illation the baid<s had purchased and deposited with 

VII -il 


MoM;^ AM) I5ANKIN(; 



tlif Treasury .S(;4l>..'{H!).r)l() of <>()veriiiiicnt bonds. A 
majority of tlitsr bonds ijorc only 2 ])tr cent inttr(st, 
the lowest rate paid by any nation in the worhl. Tims 
the predietion tliat the hiw wouhl ereate a market for 
government bonds has been fulfilled. The sreond reasdn 
for its adoption — that it would provide a uini'orm cur- 
reney — has likewise been aeeom|)lishe(l. for national 
bank notes have always eireulated freely and withoiil 
diseount. The note of the Maine bank was e<|ually 
aeeej)table in California as that of the San Franei^co 

The danger of the system lay in the priee that was 
])aid for these benefits. In making the eurrcncy stable 
and uniform it was made inflexible: and in re(|uiriii^ 
a <ie|)( it of government bonds a system was founded 
whieh neeessitated a eontinuanee of the national debt. 

4()1, licscrvc rcf/iiircmnit.s of ihc Xatioitnl Hank 
.tct. — i\ll banks were rerjuired to keep a certain amount 
(.'f lawful money on hand as reserve. l?i Xew York. 
Chicago, and St. Louis — designated central reserve 
cities— this amount was 2.5 per cent of the deposits. In 
certain other cities, called reserve cities, the amouiit w;is 
2.5 per cent, but one-hal f of this migjit consist of demand 
deposits in Xew ^'ork. Chicago, or St. Louis. All other 
banks must kec]) a reserve of 1.5 per cent, three-fifths 
of which nnght be de])osited in the reserve cities. The 
.5 i)er cent redem])tion fund might be counted as a part 
of the reser\c. 'I'he enfoi'cement of this i-i'serve ])ro\i- 
sion was a duty of the bank examiner and the comp- 





li'.'J. The (Urt'lopnioii of bditk dcixisit ciirrnir//. — 
llir history ()(' l);uikiiiu' in the Cnited States siiiee 
tlir ( stahhshmenl of the national haiikiii<r system and 
tlu att''ii(huit restrictions upon note issue hv the state 
I'.iiiks. deals ehietly with the (leveloj)iiient r)f' tile deposit 
liinction. The Coliowin^r table shows the inerease of 
(|i posits relative to capital and note issues in Idl'.i coni- 
\<;tvvi\ with IHG,"): 

lH(i5. lid:?. 

D-llars. Dollar.-,. 

< .i|, ~u^|liu^ ;in.| iiiidix idc il prnlit-. . . At.'! l.!)(ll 1.(1(11 1 si.(lt,j,()(i'( ,.5 Ifi 
l''-l'">it> j I!). 100.(1(1(1 ,;,!).);5.t(>l..V.l 

Niitcs 171,()()(),o()o 7ii.\i:,,u-Zi 

W liile national hanks had inncased four aii<l one- 
li.ill' times in nuiiihtr, the capital and surplus nearlv tive 
iiiiKs. and the noh s over four times, the deposits had 
iiivicased over tenfold. In addition to this, moreover. 
liiiist he counted the ><.S. 000. ()()().()()() of dci)osits in state 
''.inks which issued no nous whatever, 

W'v have seen that this deposit system <4a\e rise to the 
most perfect cui'reney known, a eurrincy which ])er- 
tiiinis a vast amount of money work at a minimum cost 
.111(1 which exi)aii(ls and contracts duriiiu ordinarv times 
Hilh the \ai'yino' needs of l)usiness. To this function 
tli( naiional hanking law eomplctdy suIk .dinated the 
i^siR' of notes. 

It j>iin- >w. ..--.n 4-,. 

, J ,,.... i, 


I ' 

-fi 1 I I I Kt I II V 

KV 'f . 


and (lifffrciicc between notes and (iej/osits. Hotli are 
(leiiiand ohiioations of the hank. The (hirerenee is 
ehiefiy one of form whieh oiv,s to the note oRattr 
aeeeptahihly hteanse (.f its nni rorniity. Tlie person 
who aeeepts the hank note rehes entirely npon the sta- 
hdity of the hank, whereas one who aeeei>ts a cheek 
rehVs npon the personal ercdit of the maker. The 
eonrts jiave held that the tender of a cheek does not 
eonstitnl.' payinetit nntil the cheek Itself is redeemed at 
the hank. pro\ ich'd redemption i^ re(|nestea within a 
reasonahle time. It is ol)\ ions, therefore, that the ru.te 
l)erforms a fmietion which the deposit eamiot i>erforni. 
namely, eircniation heyond the repntation of tlu' oriuinal 
holder oi' thi' hank cre.lii. 

U\:i. Liniil'ilinii nf ,lt i,n.sil r//m'//r//.--Tliere are 
])arts (,f the conntry. particniarly the nn-al districts iA 
th. Sonth an. I West, where hankinw^ facilities are poor 
and where they ninsf nse -ither notes or actnal money. 
Furthermore, at certain times o!' the year their demaiid 
for enrreney of ,,ne form or another incixases. It is 
ohvionsjy p.,.)r economy to force these districts to nse 
,U«>ld in their hand-to-hand transactions wluri tliat ,ii.ild 
ean perform three tinus the mone \ w.,ik if h<ld in hank 
reserves as a hasis for tht deposit enrreney. Whereas 
lli«' depe.sit eairreticy will expanei te. meet the' s.asnna! 
inearases .f l.nsir.ess in the tinaneial centers, it ejoes not 
■•""I 1" any way the' rural eoiiimnnitv which iieieis men-, 
actual money. I-',,,- (his, if \ny ,,<, ..tiier reas.ui. (1. 
suhor.linatie.n ..f !h<' nol.^ issne' fnne-C.n has pr.x,ntM| 
flu eeeineimy in liaiikiri^-. 

The ^n-cal danger nf sne'h a sy^t, m. however. lay in 
liie reserve reeiuireiiie nls anel e-nste)ms. All l)anks were 
permitted to keep a pe.rli.m e.f llicir reserve ..n elepe.sil 
ui reserve eiiy hanks. Tins permissie.n was ine-,.ipe.raf e el 

I'HKSKXT (OXDITfoX,. ,»F l^WKIXd 37;] 

'-''; 'I'Hau- with the i.l.a c,l\.n..,I,linn. ti,, .oMMlrv hanker 
'" kcq. w.lhout exiK-nsr a city acru.n.t as a hasis for 
-H-a.i^iV. A luMher .vason uas t„ .ncrcase the ,„„- 
"'">■ "' l-anahh. IuihIs hy enahhn- the eitv hanker to 
1"^"' I" tl'" larne ecnters the .leposit. of the eountrv 
"ank. Ihese needs eontinncl to exist Iron, vear t'o 
><■<•"•. hnt the h,anit!u hy thr city hanker of th.' eonntrv 
I'anker s ,|,j,os,ts was s.. oreatly ahusc.l that its (hm-vr's 
fHeanir as oi^al as its hrtietits. " 

UH. SrasoNa/ <icmu„ds. This ahusr ha.l its orh-in 
"I th.- enston, nf thr n.n.itry hanks of deposit in-.",,, 
''"•"'^•'■'I ecnters n..t only ., portion of their reserve, lu-- 
in^- eertain seasons o| the vear hut a h.r.v of 
•■"''''♦""i--'l eash. Sin(v eon.iu tit i.,n hetwee.i the eitv 
"ajiks r,snite<l in the payment of i,;terest on eonntrv 
''••'l;nie(s. fh.'se deposits must h, h,aned o,it. And since 
lliry were .hiiian<l dep,,sits th. v must he loaned on de- 
'"•■""'<>'■ '•■•'II- As the only liehl lor this sort of loan is 
"' "'•■ ^*'"'^ '"•"■l^"^- »•'*■ |""n.olH.n of sp<enlation was 
""■ '■'"•' '"'iction of these e.MHitry halanees. 

^^''"" "" ■'•■'"and \\n- h.atis a's well as for aetnal 
'••i'"i'y inereased in the country, as ,t invanahlv does in 
•I'; l.dc siniiMMr. thes,. deposits w,-re withdrawn a.,d 
'l"l""<iilsn| ciirnney re.(ues|rd. Loans must he sharply 
''""''■'"•'*'' '" ♦'"• 'i".-'neial .vnters. Thr <lep,,sit cur- 
rency enuld not mr.l Ih. n.rd heeause Ih,. ,h ni.nd was 
'"'•;> eirculatinnnir,|iiininfn,.nrral aeeeptahiht v. If, r,. 
^^■•'sa .l,„,and. th,r, loiv. that iin.ler a svst, ni .d' elastic 
'i<»te issu, ,,.u|,| hr linan,',,| w,tli,.ut shipni,„t ,.f i,n,ld, 
a conscciu, lit ,1, phlM.n of r, s, r\ , s an.l ,'allin.j ,.f |,Tans. 
Perhaps it is u.|| t|,,,t ,,nd, r th,- svst, 111 ,,f r,s,,v,i 
'I'P'.Mts th.iv was lhis,-h,,k up,.n speculation, hut the 

1 1 1 1 1 I ^ 

) I I V I I , \ t \ 

•y (•naiiiuiL; iii, eountrv 
I'ank, r to increase his ,,un ,-urr, ii,-y supply, uijl hsseii 






the necessity of kcepin- easi, l.alanees in the cities. Tliiv 
\^<'"l<i increase his purchases „r con.rncrcial paper with 
iunds diverted Crom the stock market. 

4<5.-,. Drp/rlion of /e.srnr.v.— This danuer „(■ deple- 
'""'"' '•^■^^■'■^^•^ ^^''-'""-t acute i„(i„K.s„r panic. There 
ua.s tlien a -eneral .lernand lor h(|uidati()n of all credits 
"■cl.Hlin.L; these .lepoMt crc.lits. liank -runs" are de- 
I7''^'l '•> '•'" '•••".kers. yet ,t is the countrv hanks then.- 
•sdves uhich ucre the first to uithdraw deposits. Kach 
''ank was anxious to increase the cash reserve in its own 
vanlts. and tins could he done onlv at the expense oi' 
v-n.e other hank. As reserves were depicted, loans n.ust 
'KM-a le<l. and the ioaninu' power <,(' the hanks was sadiv 
mpplcd at a time when it was .;reatlv needed. Wit), 
the call, no of loans can.e lallinL-' „ ices, and if horrowers 
cannot horrow they must sell .heir property at ..,,,,, 
-aerdu-e. It would not he the function ..f hank notes 
t'- prevent laihuvs of concerns which were ovca- 
♦^"•'^■•' ^""1 "nheaithy. hut the issue of true hank note. 
•;" ^'leh lime s woulel save many solvent firms temporarilv 

I" need of finiels, -'f <!< posits so ..neral holh 
"" f'c part <.f the iu.lix , dual an.l the. ..ountrv hank that 
''"'■'"-••' P''"'"'tli<city hanks loun.l th.nise'lus 
'" '■*'"^"' "" payment of .hp,,sits in eM.rr.ncv This 
^vas don.. Illegally, of ,„urse.. hut in times lik,. that 
<^Npe<hen,.N -ath.r t han legality is t h.. paran.e.unt issue' 
«■• this way only hani. n.vrv.s h,.,n maintain, .1 

■\ ^'••• n.nnev, 
••'^^ms ,s tl,.. purchase, of u.old ahn.a,!. (n.ld ma; 
al-avsh,. ohtairud provideel a sutlie i,.,,! Iv hivh p,.i,c is 
I';-' (.'III. The. Ia.-c hanks, particularl v t hos. ui New 
^-iK. ean exehanoe. their intercst-eanunt, res, hi, -res. . 
'•■"-•• ••'""""" "' •'^i"'h are. well secure, I sfoe-ks ami 

iM{i;sF.\T coXDrrioxs uv baxkixc 


lioiids, for <>ol(l ill the markets of the worhl. ()l)vioii.sly, 
however, this metliod is extremely slow and very likely 
to l)e expensive, as it may involve the sale oi' ^ood eol- 
lateral at saei'iHee pi'iees. 

4»;»;. Alilrich-rrcilaiid Aci.'V\w Aldrieh-\'reeland 
Ael of I <»()«, ad<i|)ted as a irsult ol' the panie of lltOT, 
provided lor the issue of an emer^eney eireulation by 
national hank I'nder this law national hanks in anv 
conimunity mi-iht or<iani/.e a national hanking- assoeia- 
tion, any member of whieh. with the ai)proval of the 
assoeiation. eonld issue eireulatin^- notes based upon 
(•( itain s|)eeiHetl elasses of !)onds or eommereia! jjajjer. 
riic total issue of a hank, however, eould not exceed its 
capital and surplus. 'V\\c emeroeney eireulation thus 
|)ro\id(.d for was subject to a tax of .j per cent i)er 
annum durin;^' the first month and to an increasing' tax 
in sueccedinn' months. These notes could be retii'ed 
without limit by the deposit of l(<>al tender money with 
I hi' Treasurer of the I'nited States. 

KIT. Iinldsticitji. Although the a^'<ire<'ate amount 
"f notes outstanding increased fully four times in 
amount ^incc IHti.'). the increase had notliin<^' to do with 
the exj)ansion and contraction of business. A perfect 
'•lU'ruicN must lia\e tix' attribute of elaslicitv, that is, 
not only the abiht> to ixpand wjieti nec-essary but the 
pouci- to contract automatically when the necissit\ for 
ixpansion is removed. In neither respect did the na- 
tional bank no' s meet this need. 'I'hc re(|uirement that 
bonds must be purchased, and deposited in ;idvanci', 
made the procediue s(» slow tjiat oftentimes the notes 
• niiid not be issued until the deinand for them had dis- 
appiar-ed. Confi'action was excn si .wer because of the 

restriction tb;it oni\ .so oiui itiwi ii. tli ■■,.. .•,. , i.i 

be retired in an\- oni' month. 

O ■» /> 

^H'^■|:^ and haxkixo 



[VV ol 

4<>H. !-lvp,u,si(>,i of haul: circn/alioN. As a matt, 
fiict the auH,u„t ..r iH.tcs cutstandmn varic.l not at" al. 
w.thtiK- husmess lurds of tl.r cuntrv luit cnti.rlv with 
tl'*' Pncv ..r -ovrrnnirnt h., Cpon this hitter and 
"P"" tlir nn-rcni c-on.URrcial rate „r intnrst drpc-nded 
thr pro/It to hr w.ulv out ..f rimihition. W'lu'ii honds 
^vvn■ln^v thnr uas a trn.hncy toward janvhasin- then, 
;'"<! incrcasMiu- cimdation: when thcv swiv hi-di the 
U-ndeney wa. in the ..pposde direetion. The National 
e .ty {,nk ol Xcw York, in one of its n.onthlv eirewhus 


f l;an ,t . ,11 nruv.. l.ark in nmilafino. ,,,,,. , i,,,,,„,, ,,j. ^1, ,_,^. 
'"».■„ on o.n.n,„„.„t ho.uls) a> pn.fiK ;„ nm,latH,M ■., 
<l- .'N.n.ov rat. of int.n .t i„ the ,„„„,,, ,„,,,k..t d,,.|,n..s • and 
as uvcraj... n.on.y n,a--- ' rates a.ivance, the pmtits on nr.ula 

;*'" •'*"•'"•"• ''''''^ '^ -i •■•• "'■■ r:u, that it .onl.i 1,,.,. 

*''^' ;■'""■" ^""' ^^'"'1' 't nu.>t> in at the av..,-ao. ,„o„,, 
"-'■l^'t .-at.., l.nt ,flt takes out nn.ulat„.,< it .an onlv loan an 
•'"""'"■'' "inal to the par value of the hun(l> an.l the interest 
Ol, the pre,mu,n. 

'''•'<■ I'i^Iht the tnark.t rate of interest the ..reater 
"••IS th,. loss on tins pren.inni. hence a smaller protit 
"" ^•"•^••''••'ti"M. Inasnineh as the rale ,d' interest in- 
'■nases w,tl, inereasrd dmiand lor n,o,H v. the proljt on 

*■'""''■""""'"''"'"' "''^"••""Mcnase or notes was most 
":"'';■''•. ''''"■ 'I' l'< 'iden.-e or fh, a.« .n>o„nt of 
*■"•'•"';"'"" "I-i th.s, hvo induenees was n. ver more 
••'""l'''l<l,v pn.vedlh;,ndi,rin.w \\H)H. liotl, theprireol 
|...v,.rnn,ent l.onds and Ihe r.,1. of interest were vrrv 

'"":'''"<|"' ■■'-I'""- llHf. to eirenhdion increased manv 
nnllion dollars. 

it isoi,\ i.nis that eompreliensix c nf 

••rm was n( eessarv 



if the nation was to lia\ e a cni'i'tncy which woiihl tinance 
(.rononncally its husintss needs and enable it to pass 
from j)eriods of <4reat aetivity to (piietude without eom- 
|)lete paralysis of its eeononiie inaehinei",-. The chief 
defects of the system ueir deeentiali/ation and inelas- 

K;!>. Ldcl. of unit// in flic .sf/stcni.— lw addition to the 
T.OOO national hanks tlure were a -^reat many more state 
hanks and trust eom|)anies. which weri not onlv direct 
(•om|)etitors of the national lianks hut which were <>ov- 
■viwil hy diUVreiit laws and i-eoujations. 'I'he result was 
ili\iously a nKchanism with I."), 000 managers, each in- 
terested in the welfare of his own institution. A system 
was needed wjiieh would enable the banks to work in 
unison instead of at cross purj)oses with each other and 
which would render possible the issue and redemption of 
notes as the need i\>y them mi,uht appear and |)ass. 

iTO. S'(>-in</.s hdiiliS.— A diseussiiin of baiikin<4' con- 
<litions in the I'nited States would not be complete 
without a ref« rence to saxin^s banks. The reuulatiori 
of these institutions has, for the m(»st part. \kv\\ left 
to the slates, and in most cases the states have faihd 
to pass efrective le«4islation. The savings bank is the 
bank of the wa<4e earner whose accumulations are worthy 
of the most careful protection, in thi' auHi-eoate the\- 
already amount to a fabulous sum. and the system is 
only in its infancy. The mutual sa\ inus bank law^ of 
\ew Kni^land and New ^■ork are the niost perfect. 
In thes< !)anks there are no stockholders, the profits 
Ik inti distributeil cMtirel\- anionu the d( poMtors. Their 
Investments are restricted to the very hinhesl class of 
bonds an. I morti>anfs. and their atl'airs are adminisleicd 

1 i- 1 •! ■ I 1 11' •••__• • • 

■ ■\ iiifFi wi aoiiiiV rtFiii jiiiiiiiC S]>n"il \Vilo stTXC Wltjiout 

compensation. Tn the West practically all tin savinus 






-MONKV AM) n.WKIvr; 


I.anks are nv^auhn] f,,,- p-ofit and no c-ard'ul rcul ,- 
tion ol invtstinents is attempted. 

471. Am/.,/ savi,u^.s hauhs.-^-U was this situation 
wlnd.^ave risv to the .len.and lor postal savings hank, 
--banks inanaovd hy the Government thron-h the me- 
<l"nn ol the po,t olliee department. In 1!»|() C'onoress 
passed the aet providino- r,,,- postal savin-s hanks? It 
created a lioard of Trustees, eonsistino of the Post- 
master (ieneral, the Secretary of the Treasury ar.d the 
Attorney (General, to designate and the jx.stal 
sayujos depositories throuohout the eountry. 

The Aet provides that any person over "ten vears of 
aoy n.ay open an aeeount in his or her own nam'e. One 

;'""•"•'•>• ^i "Kiltiple thereof is the smallest sum that mav 
'H' deposite.l witl, the post oUiee. hut postal savin.."s 
stamps at t.„ eents may he pmrhase.l. Interest at the 
rat., ol -J p,.,. c.,,„t per annum is paid on these .ieposits 

•Vxleposdor is aUowed to have more than five hundred 
'l'»llars. e\elusi\ e of interest, to his eredit. 

7''^' '■""'''^ rceeived are directed t.. he deposited in 
sohent hanks, statr or national. Xo one hank mav have 
"""■^■"'''" '!'<• amount of its capital stock and one-half 

'tynrplus. Inteivst of at least 214 p^''- cent per anmim 
IS to lie paid. 

The trustees may piiirliase .uovernnieiit iionds with 
part ..f thes,. p,,slai savin-s lunds. hut n..t more than 
•^" !"■'• ^''''t may he used in this wav. for ,| ,s inten<le,l 
t'» keep a workin- halance of (;:> per eent on deposit 
^;'»l' <l'ch.':iiks. Anv<.xcess of interest or pn.Hts fn.m 
tl"' investment ..f these funds is part of the postal rcv- 
'"""■• 'I'!h' Aet further pnn i.hs fur the purchase of 
.^••vernment ho„,js ,^1' denomination ..f S-jo-.^m) 1,^ the 
'Icposilors. these hnnds to hear interest at L>I.. vvr vm^ 
per- annum. " ' 

PHi:si:\'l' (ONDI'l'IoNS Oi' HANKINd ;ST!) 

'I'lii- jjostal saviii^ys t'niids aiv to he ke|)t ^rparatr 
lioni the other postal rcrcii)t.s and arr ijrottrtcci hy all 
llir laws already dealili.u' with piihlit- inonrys. The faith 
ol the Fiiitc'd States is pledged for their safety. 

It is j)rohal)le that the est.ihlishmeiit of postal sa\ - 
iti,y:s hanks will hriiio- out of hi(liii,<i' J' eoiisiderahle 
ainoiint of ^old whieh is heiiio^ hoai'ded hy ignorant per- 
sons, and that money withdrawn fi'oni other hanUs dur- 
ing' i)an:es hy :ndi\ iduals w ill he deixisited with the <xo\- 
ernnient hanks and thns find its way haek into eireiihi- 
tion. The postal hank will not eonipete directly with 
carefidly re^'ulated savin;^s hanks heeaiise of the low 
rate of intei'est that is paid and heeanse it does not oUVr 
the same hankin^' faeilities. It will, houtxcr. eatci- to a 
class whieh. in the ))ast. has not deposited its mv)Me\ at 
all and to persons in isolated communities where there 
are no oankin^' facilities. 

i7'2. (TiKiraiifcc of IxniL' dcjiosils. Then' is anothei- 
movement on foot in re^'ard to the regulation of hank- 
in^' which is worthy of note, namely, the guarantee of 
hank deposits hy the ^'ovei'nmeiit or hy the states. The 
plan is now in operation in Oklahoma. Kansas. Xehras- 
ka and Texas, and is hein^' ur<4C(l elsewhere. Hank 
failures and losses to the depositors i-esidtin^ thii-efrom 
have heen so small in the past that it is estimated that 
•I small assessment on each hank woidd create a fund 
lai>>f enough to pay the depositors of all insoUcnt 
hanks. In this way confidence in the hanks would Ite 
implicit and tluy would not hecome suhject to "i-inis." 

The j)lan has heen viudi-oiisly attackid. howcxer. h\- 
llic hanks. 'I'heir position is siihsiant iall\- that the sys- 
tem would place a j)remium upon incompetent and dis- 
iionesl o.-tnkini;. and uikici- presi tii conditions ijiri'e is 
little doiilit of the coi'reclness of the contention. 'I'lio 







stroiio- l.anlv niust be taxed td 
■'''1<^'I ''aiik. and at the same I 


I ye 


pay httle attent 

I't^'siilts rrom its stn ii-^th. I) 

I'uy the (lepositc, , ,if' the 
inie it would lose the |)r(s- 
epositors would 

<»l a hail 


k. h 

'"" "iider sueh a system to the stahili! 


leeaiise their deposit 
Hy minht select. Tj 

'•^■^■Hy l)y the iiidueements ottered hv tl 

s would he secure in ai 

H'V W,)ul(l I) 





'" ^pite of strict 

i)c ver 

y ditfieult to kfep tl 
without the knowledoc of the auth 

rc'^Milation of these iifd 

le various hanks. 

icm from hein^f uukK 

"ic i-esu 




""'<! ''^- the estahlishment 


K' me\ ita- 

"iiiiks. e.\j)ansion of credit, 
fol lapse. 

can he prevented hv t 

iiian\- new 

sjjecidation, and linall 


'■ '"l\"^"iles of the i,lan claim that tl 
i'c<iuent and scarel 


"IS position is correct onl 

icse conditions 
>i".H' t'xamina- 

are |)oss!hle. And it has I 

y it such examinat 


eoimtry that tli 
'"ily to lia\c the 
insoh ent I'or vear 

"■cii [hv experience of tli 


cs w ho ha\ 

•"■'.V true it a national svst 

<^y ii'v not. Many hanks have failed 
receivers discover that tliev have I 

s uithout the knowlcdoe of the autl 
lis Would l)c pai't 

e examined 







<-"l'»pled tocoNir hank 

em ot u-iiarantce wen 




i<s(>|)eratino- under different 

itr or not elfectiv 

JK'ssihle III a sinnle state where hank 

t' examination i« 

uniform will I 

and upon the effect 

>c seen in the experiei 

"t,U' eonditioi 

IS are 

ice ol 



K'M depends tl 

iveness of the examinat 


le success of th 

K'li and reo'u- 

rcat interest hecaiise. if it p 

watched with 

CMhIe. it uill he ucnerally adopted a 

in the science of hankinii'. 

• \steni. 




s practi- 

s a nreat advai 




II \ 










IT.'}. M(ir/,(l /(ir sci'iiritirs in I Ik Suited States. — 
<\\ ^■()l•k C'it\- is iiir central iiiarktt of the Tiiited 

Uates for st'ciii-ities just a Lomion 

IS () 

f tl 

le \v 

t tl 


\\«)i-|(j. The term Wall Street, hy whieli is mean 
(iiiatieial center in New \'()rk. is synonymous with mar- 
kets I'or stocks and hoiids. Whenever the capital re- 
• |uirements of an cnterpi-ise ai'c too 1; 

irm- for the local 

aj)italists to handle it is the custoni for ]>i-omoters to 
inance tiieii- proposition in New \'ork. Capitalists 

w ! 

th funds for investment and an enterjirise needin' 
those funds are l)rou^ht together hv the financial insti 

lutions of Wall Street. The husin 

less of hrin^'in^- 



apitaJists and the enter])rise toj^'cther is wi-v compli- 
ated and may re(iuire a lon^- time. In fact, a lar 


p|-0])01'tlOIl o 

f tl 

le seem-ities Hoated in Wall Street n 

main there in the hands of the promotei's. 

When a coi-poiation wishes to raise capital it may 
issue either stocks oi- uonds. In oi-dei- to dispose of its 


s and t)on(is 

d 1 

to tl 

le capitalists it is necessarv 


market he made for iiiem. When the rnited States 
Steel Corporation was or<4ani/.ed in r.»()l the prohlem 
of disposin;^' of the \ast amount of stocks of that cor- 
poration \\as an e\c'eedin,ul\- I'ormidaMc one. The task 

>f i, ttin 

iR' slirewi 


piililie intercNti- 

as ( ntrusle 

d t 

(i lo one ol 

siocK markit mam|)ulators on tlie ^'x- 
clian,i<e. .So successfully did Mr. Keene mani|)ulate the 
market foi- hoth common and preferred sliares that the 


■ *•-•'■' 



.MoM.'i AM) H.\\KI.N(, 

l)iil)lic. si)((ul;it(.i-s and iincvst 
Iny^v hiicks of tl 

ket I 

•'I's wrir induced to h 

ii'sc securities. 

ii'iv is a i-ivat (leal of similarity l.ctwcrn tl 


ic inai- 

or srcuntics and the market i 

and tli( 


or any rjtlici- com 

!'• interval I.etueen the issue ..f the securities 
>""nient when they reach the ultimate investor 

"lio puis them au 
the income w jiich tl 

\e oi 

ly III his strono- hox f,,,- the sal' 
K'>- eain. ie(|nires the use of circulat- 

ing' capital, just as a merchant handliiii.- d 

ry «4-oods must 

pnn i,lc suttieieiif capital to carry liis stock of o„od 

an averanc of fn.m three t 

.s on 

47 i. Jt'orh 

o six months 


// ■sffiiritics. — Tl 


emen w 

///,;'■ cd/'itfil of (/((ilcr.s i 

I'" <'arry the securities in Wall Street he- 
("iv they reach the ultimate investor need in their Inisi- 
11' ss enormous sums of temporary capital. These mid- 
<'l^"ieu are the hon<| houses and the speculators. The 
^•aj)ital re,|uired is laroely furnished hv hanks, nearly all 
'.'*' '^ '" »'"• !■'"■•" -r hank .-rclit. The corporations which 


le secui-ities are paid for them 

|)ass into the hands of the middl 

as soon as the\' 



le middleman 

le cor 

will prohahly pay (or them with a check which tl 
l""-*'t'"" <-"i deposit au.l a|.'ainst which it can draw its 
own checks in niakiiin- payments: these checks drawn hy 
the corporation are prohahly deposited airaiu, and so on 
"Klcfimtely^ This hankcrecht whici 
cii\es for its issues of 

1 the corj)oration re- 




IC middlemen. (>itlier hond 1 

louses or speculators. 

who purchase the securities, horrow the hulk of th.i' haul 

credit tluy re.)uire from the hanks. The hanks makin^r 

■I ^Pyi'iHy.f loanino. credit for this purpose arc known 

I'iie credit loaned 


'I iiii.tfKiai iianivs. 

o the speculators or hond I 

louses IS I), 


on coll.itei 

securities serves the purjKJse of I 
'^' forporation in producing' whatever capital n,,„ds it 





M'c.inty. Tliis collateral scrunty is the .same slocks and 
IioikIs wliieli the credit paid ('op. 

47.3. Dclail.s (,f the collalcr/il loan. Wv have (hs- 
eiissed, in tiie chapter on loans, the natnre of the collat- 
eral or call loan. The vohinie or amount of this partien- 
lar husincss is so enormous that it is worth while to ex- 
amine more closely its details. Sni)i)ose. Tor example, 
that a si)ecnlator hnys 100 shares of Cnion lacific com- 
mon stock at 11>.). This ((notation means that the 100 
shares of I'nion Tacitic stock are worth lO.") |)er cent of 
par. which is nearly always .<<100. Therefore the 100 
shares will cost the speculator .Sr.>..>0(). The stock will 
he purchased thron<.h the hroker. and if the jjurchaser is 
a speculator and not an investor it is (juite likely it will 
he purchased "on mar<^i?i.'" The customer deposits with 
the hroker from 10 per cent to 20 per cent of the value 
of the stock in order to j)rotect the hroker a-^ainst any 
loss should the value decline. 

The rules of tiie New \'ork Stock Kxchanne re(|uire 
tliat every jjurchase and sale must he hona tide and that 
actual delivery of the stock must he made. The hroker 
IS not in possession of enonoh eai)ital to })ay for the 
stocks i)urchase(l on mar^-in hy his customers and must 
i-o to the hank for accommodation. The hroker pays 
for the shares hy drawin^r a check on the hank with 
w hich he is in the hahit of doino- husiness, and hy having- 
it certified. The hank Mill loan on collateral like i 'nion 
Pacific prohahly HO per cent of its market value, which 
wives the hank a mar^'in of 20 pcv cent in ease there is 
.1 hreak in the j)rice. The halanee of the purchase price 
IS made uj) hy the marnii, ,,f the customer and the capital 
of the hroker. 

1T<'>. ('irti/iratian. ]{ is (juite likely that at the time 
tile hroker asks for the certification of th( cheek he has 


.M()M:V AM) n.\NKIN(i 


not siilliciciit CiMids in till' hank td vinvw nor can lir 
liypotlKcatf the stock until hv lias paid for it. The 
l)ank. Iiow.vcr, readily (rrtifR's the cluck. diiHaidin^r 
npon the receipt of the collateral and the oiantin<i- <'f a 
demand loan w ithin a few lion is. 

This is o\er-certitication and is I'orhidden hy the \a 
tional liank Act. which says that no national hank may 
certify a check unless the drawer has on deposit a sum of 
money e(|iial to the amount (d' the check. Jn Wall 
Street this law is ^-enerally disreoarded. I'suallv the 
i)anks protect themselves a.yainst technical violation hy 
^•ivino- the hrokers credit for certain sums for tiie day. 
accepting- a note in the mornino- for it. 'riiese notes are 
called "day notes." \o interest is cjiaroed on the credit 
cxtcTuled, i)ecause the hrokers are constantly depositing- 
checks as well as draw in^- them. The extent of this hus- 
iness of certifying' j)rokers' checks is api)ai-ent from the 
H<'-ures for the year ciidiim' Oct-'her 1. li)()(;. whicli 
amomited to the enormous sum of '•'>(). OOO.OOO. 

477. Restrictions on colhitcral.—Mos 'he l)aiiks 

are veluctant to take too much of any one setunty as col- 
lateral, and it may he necessary for the broker'to have 
several . ..nk conneciions so that he (•.•!•) (hM;ihrle the 
shares amono- them. Csually the hanks will not take 
uuhistrial shares alone hut reijuire an admixture of rail- 
road shares. I-'urthcrmore. only those securities which 
have a ready market will hf used as collateral on demand 

trs. Call loan /Y//r.— The rate of interest char^-ed on 
these demand 1; •nis is excecdinu-ly variaf.le, running- all 
the way from 1 per cent to IHC per cent per annum. I f 
durin<>- the course oi' the loan there should he a sharp 
advaner m iiiuiiey rates tiie i»orro\\er is notified that the 
rate charged will he advanced. If the broker oi)jects 





tt. the advance lie is at liheity to pay the loan and seek 
.urornniodatioii elsewhere. Conversely, if the rate ^oes 
down he may elaiin a rcduetion from the hank. 

470. UcsponsihUUics of the Inau clcrh.^ All eollateral 
loans are in eharne „f' a loan elerk. In the ^reat Wall 
Street hanks this is a most responsihle i;osition rerinirin^r 
keen and constant vin-ijanee. The loan elerk must keep 
a sharj) watch of the market and he HiUst kru)w what the 
money market is doin^r. Uc must keep an eye con- 
stantly ,,M the ticker (as the instrument for reportin^r 
(|Uotations of securities is called), in order to see tha't 
tlie margin of all the collateral loans of which he has 
("har^x-e, is properly kept. \\^ there is a sud.K-n slump 
m the market, if the value of a collateral ^roes down 
and the mar^nn is not maintained, he sends immediate 
notice to the horrower for more collateral. 

There are certain i)eriods when the investors ha\e 
A^nne out in the market and paid for a laro-e pro- 
portion of the securities. Such was the case ?n ]H!)7 
hefore the hoom ])e<ran under the McKiidey Adminis- 
tration. The hanks were carryinn- a \ cry small amount 
of collateral and th.e rates were very low. 

'«^. VmUffcstcd sccurith's.—lu li few vears the con- 
dition chan-ed entirely. The notations',,^ hundreds 
of industrial comhinations in the period from 18i)8 to 
HXm hrouoht into the market an enormous (juantity 
of new securities. In fact the issues were so last that 
the l)anks were soon filled up to their limit with, collat.ral 
loans. The Wall Street hanks were furnishin^r the cir- 
culatmo- capital on which the new corporations were do- 
mcr husiness. The stocks and honds thus held hy the 

hanks were mllfvl "iiiwllo-nt+^'l - ri.-- _ ■" mi _", 

IS a happy one expressin^r as it does the stoppa^re in 

the re^nilar i)rocess c jassing the securities alon.r to 
VII— .v, " 




the ultimate investor. Tiie securities wliicii thus failed 
to move naturally were the cause of a serious disturb- 
ance ill the financial mechanism. The banks found that 
they had extended their credit to the utmost and were 
unable to jirovide sufficient funds for industrial pur- 

The condition was remedied by the crisis of 1 !)().'i which 
is called the "ricl, man's" panic. Prices beoau to de- 
cline uhei, the banks be<ran to sell out the collateral of 
weak holders who were unable to furnish additional mar- 
gin. The cumulative efTect of these forced sales caused 
a very sharp break in prices, which tempted the investor 
to enter the market and take away the securities, thus 
restorin/r the nu./ket to its normal condition and ^et- 
tin-,-- it ready for the <iTeat l)oom which culminated in 

481. Close relation hetzccni reserves and ;>r/Ve.v.— The 
credit which tlie financial l)ankers of Wall Street extend 
to the dealers and speeul. 'm's iu securities is based upon 
cash reserves. Tb" National Hank Act. bv permittin^r 
the interior hw,^ .,, deposit half or tbree-tiftiis of their 
cash in the res»-rve c;\v banks and still count it as re- 
serve, cncoura<rcs the pilin^r np of cash in these central 
markets. 'I'his prru'css is known as "jjyramidinir" the 
reserve. The dan-rt,- of ihis nuthod lies in the insta- 
bihty of this cash reserve, which sustains the cri'dif 
structure of AVnil Street. Whenever from any cause 
he interior banks withdraw tlicir cash deposit the New 
N oik banks are forced to contract their credit, whicb 
means that they nmst call some of their demand loans. 
SoMic of tlif speculators will be unabh to eai-rv their 
stock an<i must sell at wliatever price thev can ^r^-t. 
So close is the relation between all kinds of business 
ill this coMiiry tliat a iireak in the st(.eiv market from the 




c-auscs menti(„„.,l al.ovr is likdv to l.avc ;, v.-v .icp.rss 
in- cfrect,nut tlic ul.olc c-.untrv. Ml „r the 
|.eri,.,ls <.i' (kprcssio,, wliid, this c.untrv has experi- 
'■•H'e<l Iiavc h,rn initiate,! hv a panic in \Vall Street 

-yter th. panle of VJ07 a «reat u.any people ehar^r^ 
tl.e tron'.le to the law pennittinM' the-^. of re- 
serves. The ^^ itluirau.l of these reserves was ..hviouslv 
''^^ "".ne.hate eause of th,. panie. The a.lvantao-.; 
fn-eu.r. of the n-.h.positin-,' of reserves In eeonomi/- 
l";^' the nse ol eash are so many thai it vvo„M prohahlv 
hv wiser to regulate than to abolish the system 

iH'J. Plan for rcwali,},uj th, dan<nr in rale position 

>rscrvcs.~i)n. of the authors has elsewhere made the 

sn,.xest,on that the danuer of pynnrnMing u.ight he 

■•"•«vly el.nunated hy dividino (he hanks in \ew York 

^ ily into lu<. elasses, eommereiaj and tinaneial 

(■"n.mereial hanks furnish eredit to merchants and 

"lanulaeturers to he us.. i in tne production and M.ove- 
""''* '•' -'""'^^ "'<■ '■'"^'"^•i^'l '•••"iks furnish credit to 
'"•nkers and dealers to h^. us.,! i„ purehasino. ,nd hold- 
-ig scurdies uhich ar,. dcp.,s,t,,l as collateral for the 

'"""s. "■^■•I'sfin.i-ulslnnn. feature of the tinaneial hank 
- I.e collateral loan. This fa.-t su...vsts a plan lor 
-Ntnctu.u. th, resources of the speculator without at 
"le san., time placing- any hurdcn upon inu'.,strv an.l 

^H.^ Cnnnncrckl hanks.- Let Ih,. national hanks in 
the t M-ee central rescr^ e .•ities-\cw V..,k. Chicago, and 
>'.;nu,s«eduided into the tuo class, ..commercial 
"Id fuiancial. Leav t., th,- c,,uirn, n-ial n-dio-rd '>-u' 
'M ti.e pnvik.ues they ,mw enjoy un.lcr the Xa^'n'^I 
'i.ijik Act i.xcept such as h.Tcinafl.r state.h. an,l in 
^•wditmn pcnuir ih,,u io ,vcrcise hust cunpanv func- 
loiis, such as acting as trustee, a.luiinistrator, r(-gislrar. 




etc.; also <y\\v tliciii autliority to have savings depart- 
ments uiuler strict saviii<j^s hank laws. This concession 
should he granted to hetter enahle them to comiKte 
with the state i)anks and trust companies. Xo eomii. 
eial ha!ik should he allowed to make ly loan, or to 
discount any eoinmercial paper for an\ hroker or any 
loan secured hy the deposit of stocks or honds, unless 
such collateral is taken to secure a loan already made, 
or one the proceeds of whii'h are not to hi' used in trad- 
in>4' upon an e\chan<4e. \'iolations of this i)rohihition 
will cause the hank to he classified as a financial hank. 

^Hl. Fiiianria! hanhs-.- A financial hank should have 
the ri^ht to make loans to hrokers ui)on collateral se- 
curity of stocks and honds or warehouse receipts. How- 
ever, they should not hi' permitted to receive deposits 
from any other hank oi- hanker or from any tnist com- 
])any. They should not he permitted to issue circula- 
tion, hut should have the riylit to deal m honds and 
underwrite issues of honds. Kvery loan made shoidd 
he posted in a puhlic place and ^Wc the name of the 
horrower, the amount, the rate of discount, and the 
name of the security. 

Xo national hank should deposit any of its funds in 
any other institution exce|)t a commercial nali(.nal hank 
in a central reserve city or in a national hank in another 

The forcgoin^r provisions are an attempt to deal with 
specidation on the hasis of present ha?ikin^r laws. It 
is to he hoped that in the ruar future all the hanks nt 
the country may he incorporated and reirulated under 
one system. l''inancial conditions can ne\ci' he thor- 
oughly conti'ollt(' 

nor can 
I i;...: 

le speculati\e exj)ansion 
1.1 i:i »i.. 

, i .. I . 

. -. I 

i i i K ." 

and trust companies are made to conform to the re- 


(luirements laid down for iiationnl hanks. It is a great 
anomaly to put strict limitations upon the national hanks 
and expect them to compete with uiu-epdated trust 
companies; hence, in the provisions ahove, we have 
yranted to the commercial national hanks the functions 
uf trust companies. It were much hetter, though, to 
ill l)rive the trust companies of hanking functions, which 
IIrv have accjuired, hy usurpation, until the states 
recognize them hy statute.' 

' Baiiktr'a Mayaziiie, Aug., 1909, |). 19J. 

15 AN 



•i8.}. licspousihUitji of llif Scnrfur// of the Trcasurn 
— Few people have any a(l((|uate idea of the power and 
responsibility attaeliin^- to the j)osition ol' Seeretary of 
the Tnited States Tivasnry, This jjouer and respon- 
sihility uas not eonseioiisly oi\rii io the head of the 
deparlnient hut exists hy reason of the failure of Con- 
gress to assume a Iturden and resj)onsihih'ty whieh })rop- 
erly hilotjus to it. C'on,yress. or<hnarily so eaoer to ha\ e 
a hand in e\c'i-y (jui'stion of ini])ortMnee and so jealous 
of its jtrerooatixc. has in lliis ease liaeked away timidly 
frou! tile piohUiii. Icax in,u the Seeretary to orappk- 
'vith it as i)est he ean. handii'ai)iH<l as he is all the wlule 
Iiy notoriously iiiade(|uate legislation and compelled to 
take advantage of every little teehm'eality and am- 
l)i^niity of the statutes in ordci- to sa\c the eouniry I'roni 
eiMistantly thi-eatenin^' panics. 

'I'he a\ira^-e Congressman mav know soniethinir 
about the silxir tjuestion (!.• jiad to learn that when 
the matter was the paramount |)oli!ical issue in ISlXi), 
liiil ha\in;4 ^one so far lu would he oidv too willinir, 
)f it w( re ])ossihle, to regard ;,s settled the whole iutri- 
eate and per|)le\in<,^ siihjeet of currency and finance. 
He realizes that it is a. ••li\e'" wire and that when it 
sj)utter.s the a{)j)ropriate thing- for him to do is to run. 
Somchody. Iiowever. must take charge of the situation 
and face the dajinrr of a shock. In tiie ease of the 



funvncy problem tliat man is tlic Secretary of the 

The situation which confronts the Secretary is this: 
Tlie (iovernnv^nt is the hirgest financial instituticju in 
the country, it.' receipts and (Hshursements together 
amounting to four or live millions of dollars daily. A 
large })art of these transactions is made in cash, and 
the daily balance (hie from or to the New York Clear- 
ing House must be settled in cash. It may readily be 
seen that when the I'cceipts happen to be greatlv in ex- 
cess of the disbursements, the Treasury ai-w Sul)-Treas- 
uries will have on hand a large surj)lus of idle currency 
which has been withdrawn from circulation and from 
ti'c reserves of the banks. 

iH(>. Trciisuvji vdiiscs slrin/'ciidcs. — There is a cer- 
tain (juantity of currency in the country, consisting of 
the various govermnent issues and national bank notes. 
Its amomit can be increased or diminished but slowly. 
The larger percentage of it lies in the Treasury; part 
is in the bank vaults serving as the l)asis for credit; 
the remainder is in the pockets of the people. Should 
aii\thing ha|)pen to increase the amount in use by the 
peo|)le, it must come either from the bank reserves or 
from the Treasur\-: ii' an unusually la'ge amount lions 
to the Treasury and is not disbursed then tlie amount 
in the ba!d<s or in circulation is re<luctd bv that much. 
During the past few years it has fi'eijumlly ha|)j)ened 
in the autunm season that both the amount dema?' led 
for circulation and the amount lodged in th'- Treasury 
have increased suddenly at the expense of the bank re- 
serves, especially those of New York City, causing an 
acute monetarv stiingcncv. 

The gieai buik oi^ ijic exchanges of tile country is 



made hy means of rirdit ratlRT than currency. How- 
ever, the aiiioiml of credit available for this use is rig- 
idly limited hy the amount of currency >vliicli may be 
employed in bank reserves. If the l)ankino- credit of 
the country is e.\i)an(led to the limit permitted by law 
and a ])ortion of the reserve funds is suddenly taken 
away, the banks must contract credit accordinoly. hence 
the immense importance of the weekly statement of 
the New York C'learinn- House banks showing the con- 
dition of their reserve. A contraction of credit means 
a diminution of |)urcliasing power and a weakening 
demand for everything that is bought and sold, stock's 
and bonds being especially sensitive to this inHuence. 
A sudden withdrawal of cash funds from the Xew 
York })anks and the immediate contraction of credit 
which follows when credit is expanded, is likely at any 
time to l)ecome the initial cause of a panic which might 
spread outward from Wall Street until it involves 'the 
whole country. 

The Secretary of the Treasury is re(iuired to keep 
in the Treasury or Sub-Treasuries all tlie cash received 
by the goveriumnt, except the receipts from internal 
revenue, amounting to about $1.()()0,00() a day, which, 
beiore the\ arc "covered" into the Treasury," may be 
deposited in certain banks designated as I'nited States 
depositories. As security for these the baid<s must de- 
posit with the Secretary of tlu Treasury Tnited States 
bonds to the full value oi the deposit," or other bonds 
at the discretion of the Secretary. 

This, tlien, is the situation. The j)rospcrity of the 
country depends to a large extent on the conditions in 
the financial center. Healthy financial conditions dc- 

•'•••""■■••'• '••"■ '^le;;;; ;i '< I'ii i<i Tiit i()i ijse 

in the markets; an inciease leads to speculation, while 


a (Itcrtase may lead to dangerous })anic's. In a word, 
thr uliok' of our iiidustri >\ and linatit-ial lil'e rests upon 
the t'ouudatioii of easii in the Xew York bank reserves. 
'I'iiere are two ways by which this cash reserve nsay be 
interfered with — by withdrawals and shipments West 
and South during the autumn season when those sec- 
tions need an unusual quantity of cash monev; and by 
the pilino- up of surplus funds in the Treasury, liy 
whichever manner the funds are withdrawn the effect 
is the sanie.' 

4H7. Defective currcncn larcs. — The condition above 
outhned is not inevitable but is the unavoidable conse- 
(|uence of our currency and the treasury laws. We 
know that the system gives rise to grave dangers which 
threaten the happiness atid Avell being of every jjcrson 
in the country. Congress rel'uses to change the law 
and the law is incapal)le of meeting the conditions as 
they arise. The bankers of the country, jjarticularly 
of Xew York, are often loudly blamed because they 
allow such conditions to arise and exist, but amouL'- so 
many, who is there to take the responsibilty or with 
sulficient power to remedy the matter:' The banker is 
conducting a private business for private gain and there 
is no reason why he should be expected to assume a pub- 
lic function of such, magnitude. 

^KH. L\r pal it'll Is of tlic .sccirtari/. — The rcsj)onsil)il- 
ity falls, therefore, upon the Secretary of the Treasury. 
rie is given specific discretionary powei-s in enforcing 
the laws and out of these certain exi)edients have been 
devised which may be used mider certain conditions: 

1. The secretary has induced national banks in one 
way or another to take out notes in advance of their 
actual needs. 

2. lie has anticipated the payment of interest on 

'Si-c .\|)iHii,|,\ in •■ |{( scrvp Act." I'li^--. ,)t(! ,/ .v,r/. 




Tuited States l.onds in order to put casli into cirou- 
Ja' on. 

3. He has made purchases of (^nited States bonds 
lor the same purpose. 

■1. He has made a rulin^r that tlie banks need not 
keep a reserve a<?ainst ^rovcrnment deposits. Tlie Xew 
York Clearing/- House Association, however, continues 
to enforce its reserve reciuirements against members, s„ 
that tlie effect of tlie ruhn-, so far as it concerns the 
Xew ^ ork banks, is (Hilhtied. 

o. He has allowed the H()vernment depository banks 
to substitute county, city, state, and other bo'nds, in- 
c'iudu'g, it is understood, some railway bonds, in tlie 
place of Ignited States bonds as security for i)ublic de- 
posits. This privileoe was extended only to such banks 
as would au-ree to use the I'nited States bonds thus 
released for takin;^' out additional circulation. 

(i. He has warned the depository banks to abstain 
troni using their I'unds in Wall Street as a basis for call 
loans to speculators through brokers. 

7. He has entered into the foreigti exchange market 
to assist the gold importing movement by givin.r the 
banks temporary deposits of gold e,,ual to the anmunt 
tiiey engage for import from abroad. This removes 
the disadvantage under which our im|)ortinL.- bankers 
labor that of losing interest during the time le gold 
is in transit and to a considerable extent stimulates 
^old imports. 





iVAf. Bank of K upland. —Tht; Hank of England 
owes its orio-iii to conditions similar to those whidi ob- 
tained in the United States wlien the Hank of Xortli 
America was founded. It was estahhshed in 1(504 for the 
purpose chieily of assistino- the fiscal operations of 
the ^fjvernment. On account of the war with France 
the ^-overnmcnt was })adly in need of money. Taxes 
of all sorts had been levied but it was very difKcult for 
the government to borrow i)ecause of the confiscation 
in 1(572 of funds borrowed in like maimer by Charles II. 
Althouo'li this sum, amountin<r to tl..'i()().()()(), had 
linally been j)aid. bankers and individuals of wealth 
were still very cautious about making advances to the 

The original charter of the Hank of Enu'land pro- 
vided that it should ])e given the power to issue notes, 
to deal in coin, bullion, and commercial bills, and to 
make advances on goods and merchandise; these powers 
biing contingent upon a loan to the government of 
I' 1,200,000 for which the bank was paid 8 per cent in- 
terest. From its ability to issue notes the bank found 
itself in possession of an ecjual anunmt of currency 
which it was at liberty to loan. These notes were not 
payable to bearer, hence passed oidy by endorsement. 
They were ])ayable at specified <latcs and bore interest. 
In 1(597 the capital of the bank was increased, a further 
loan made to the govcrmneiit, and the bank was 



:vro\i:v and hankixg 

given tiir iiul,t to issue (K'niaiid notes witlioiit interest. 
^ In 17()!t an attempt was made to nivf to the liank of 
England a monopoly of the bankino- business by pro- 
yuhuu; that no eorporation or partnership com])osed of 
more than six persons should be given the power to 
issue eireulating n(jtes. 'Vhv issue of notes at that time 
M-as supposed to eover the entire field of banking, hence 
this provision was understood as prohibiting any or- 
ganization of more than six persons from engaging 
in banking in any form. It is obvious that this did ntPt 
prohibit the issue of notes by in(hvi(hiais or corporations 
of less than six i)ei-sons; nor did it prohibit the operu- 
tjons of l)anks of deposit by large organizations. This 
fact Mas not understood for many years, however, and 
with the exception of small "nstitutions the liank of 
England enjoyed a monop<,jy of the entire field of 
banking. The effect of this monojxjly was not felt at 
first, but with the general development of commerce 
M-hich took ])laee in the latter part of the eighteenth 
century a demand for credit instruments appeared 
which the Jiank of Kngland could jiot meet. There 
sprang up accordingly a vast amount of small but weak 
banks, whose notes soon flooded the country. Thev 
were issued for the most j)art in small amounts, and iii 
1777 a sueeessi'ul attem[)t was made to drive them out 
of circulation by prohibiting the issue of notes in de- 
nominations smalLr than £.5. 

4!M>. Dnrlopmcnt of the use of chccks.—Mr. C'onant 
in his "History of .Modern Hanks of Issue" says: 

Till' j)r.)lii!iit;r.n upon note issiius was prohnljly one of the 
causes wliieli i<.iitril)uted to the use of cheeks. Tlic notes issued 
hv private bankers wnv at fir>t written on paper for auv odd 
ouiu, like proinibbory note>. I'lie practice was introduced hy 



C liild & Co. in 17^9 of liaving tlic notes partly printed :ui(l 
[>,irt!_v written, like a modern check. These notes continued 
to he issued till ahout 179.'5, when the existing system was intro- 
iluci'd. of giving the depositor a credit for the full amount of his 
ill posit- and authorizing him to ih-aw checks at his convenience 
a<,rain>t it. 'I'he issue of notes by private bankers was not 
forbidden until the Hank Act of 1844. but, their use grad'ially 
diminished as the greater convenience i checks came to be under- 

The intimate relation between the Bank of England 
and the government, wliieh had been estabhshed at the 
outset, continued as time ])assed. The charter was re- 
newed from time to time, usually on the condition of 
.idditional loans to the government. The war against 
Xapoleon was financed largely })y the Bank of Eng- 
land. Mr. Pitt drawing heavily upon the bank for money 
which was sent to the Continent to promote the war. 
These drains of s[)ecie continued unabated until the 
bank was forced by Parliament to suspend specie ])ay- 
ment in 1797. The suspension, or restriction as it was 
railed, continued until IH21. 

During the earlier })art of this period the Bank of 
England was able to keep its notes circuLating at par 
with coin. The act of 1797 had made them legal tender. 
I'inally. however, depreciation began, and during the 
h(K)m which followed the panic of 1810 assumed con- 
siderable proportions. In that year a committee was 
ap})ointed by Parliament to investigate the fii\ancial 
and monetary situation, and a report known as the 
Bullion Re})ort was the result. In this re])ort the real 
evils of the situation were ably expounded, and recom- 
mendations made wbieb. if ad.ontcd Dronintlv wonjd jinve 
restored the currency to a stable value. It served, how- 

? { 




pc,.to.,lu(,lsnn.Mnker.snr,cl public- nun 
^" :'" -"..kTstar.di,,^. of the prnhlcn.s i„volvc.l, an oIm- 
oat.oM winch l,„re fVnit a ieu- vcars later. 


■'^-a.nonnt nl ...M. ,vsnn.,>t,onhc.,.anK. a fact A 
Hvsan.e tnn. the o-ovcnuncnts pnu.Mo hnn-ou "r^.n, 
-'-•'< -as n.stnc.te,l so th.t nn nn-ther l,.ans eonl. 
lH.^.nh^., h.nt special an.hon.y ,Von. I' 

m 1823 .t was (hscovcred that the Hank of En.rl,,,,] 
haci not been .iver, a monopoly of hankin^r excq,t in 
Its note issne fnnction. There followe.l aeeonlinolv a 
movement to establish joint stock banks of deposit 

.,;;'^' ;fi^fr^^'-^'--'-^swereinm.e:;!: 

My estabhshcd, bnt it resnlted in certain c-oncessions 
^"'-/- I^ankofEn,dand. In 182(> the bank con- 
sented to the establishment of joint stock banks of issnc. 

A ';'"; . :; ""'" ""'^^ authorized in London 
an lucnnty but they were not ,nven the ri^ht of issue. 
In lH,i,i an act Mas passed by Parliament which made 
the notes ot the Rank of Kn^huul le^al tender as Ion. 
as they w-ere hem- redeemed in ^old at the bank. The 
notes had been le^^al tender prior to this act bnt ordv 
dnrinn- the restriction period. 

491. Bank Act of m4.-Buvir,<r the vears which 
followed the establishment of joint stock banks of issue 
seventy- wo such banks were or^rani.ed and note issues 
.Mcreased. In 1830 and a^ain in 1830 panics occurred 
and It was popularly thoncrht that thev were caused bv 
an excessive issue of notes. The result" was ar, a^^itation 
; ;, ^^;minated in the T?ank Act of 184-1.. The charter 
of the ]iank of Enu-jan.i was liefore Parlianient f()r re- 
newal. The new charter provided for the entire sepa- 





ration of the banking and issue dcpartnicnts. 
Iiank was ordered to deposit with the issue dej)artmeiit 
L 1 !•. ()()(),()()() of ^'•oveniment seeurities, wliich rej)re- 
M!)tc> the average amount of eireulation then ontstand- 
inn-. This deposit inehided the ^'•overninent's del)t to 
the hank, which amounted to €11, 01.), 1 00. In return 
the I)ank received an eciuivalent anuMint of notes. 
I'lU'tlier notes couhl he issned only after a dejjosit of 
L;(ihl coin or hidhon with the issue dei)artmcnt, the riiiht 
Ml' deposit hein^' ojjcn to anyone. Joint stock hanks 
.>f issue were allowed to contiinie issuin<r notes, hut if 
they retired their circulation it could not a^ain he issued. 
In order that this nn"^ht not cause a contraction of the 
currency the IJank of Kn^dand was <riven the ri<4ht to 
increase its de])osit of bonds and the notes which it 
would obtain for them to the amount of two-thirds of 
the circulation retired by the .joint stock banks. 

Hy this act the character of the bank note was 
changed entirely. Formerly it had been a credit in- 
strument, dependin<r for its current redemption upon 
the reserve of the bank and for its ultimale redemption 
upon the hank's ^eueral assets, the bonds, notes, etc., 
for which it had been exchano'ed. Its volume ex- 
panded and contracted with the demand for medium of 
exchan<;c. That its excessive issue could have caused 
the j)anics of IH.'iC. and 18.'J!> is inconceivable. The 
hank act converted it into a <rol(i certificate — a mere 
warehouse receij)t for <jold — destrovintj- entirely its 
(•redit character. Its volume can expand now only after 
i dei)osit of an equivalent amount of ^old, hence the 
only economy the system attains is in the greater con- 
\('Tiie!ice of !)a!)er monev. 

1.02. Chamclir of Hank of England natc.—Thi: Iiank 
act was followed by a considerable increase of deposit 







banking-. Ilnur its inelasticity was not felt until the 
panic of IH^T- In that year, and a<rain in the panics 
of IH.)7 1H(!(;, tlic (leniand on the hank for notes 
was so ^vc-di tliat the y-overnineiit susjjended the hank 
act and allowed the hatik to issue notes hased on its 
genera! assets. The -ate of interest at which the hank 
could loan its notes was rixed in 18.57 at 8 per cent, and 
in 18f)(» at 10 per cent, and the interest was to he credited 
to the government's account, so that the hank would not 
increase its loans nnnecessai'ily with the idea of niakin^r 
lar^e ])rofits for itself. In this suspension system, lies 
the ojdy elasticity of the Kn<4lish plan of note issue. 
It has iiad the desired effect in the i)anics iii wliich it 
has l)een used, hut hecause it dejjcnds upon the consent 
of Parliament it is a dangerous device to rt;y u})on. 

4!):J. The Ihtuk of Eiiirlaud private— The Hank of 
Kn^land has always remained a private corporation, 
hent n])on earnin<^- ])rofits for its stockholders. It is 
managed, iiowever, in the interests of tiie whole country, 
and its management has always l)een so etKcient and 
unselfish many ])eople are under the impression 
that it is a ^n)\ti'nment institution. It still n-pcafly as- 
sists the fiscal operations of the government hy man- 
a^riiicr the puhlic debt, receivin^r ^ovt rtiment revenues, 
and making- \arious payments, hut over these lunctioi's 
the ^n)vei-nm( nt has no diicet control except when it^' 
contracts with the iiaiik expire. 

With the growth of deposit hatlkin^^ the resultant 
iricrease of .joint stock hanks of deposit and restrictioji 
upon note issue tin Hatik of Kn^land has hec«)me 
chiefly a hankers' l)ank. It is not ^om iiud h\ hankers 
hut hankers are its cnstomers. in fact the charter |)ro- 

directors, and the iioard is composed largely of mer- 


cliants. Its diief usefulness to bankers is as a depos- 
itory of their cash reserves and as a hank of re-dis- 

There are no laws in England compellinrr banks to 
keep cash reserves, their size bein«- kft entirelv to the 
.lud^rment of the managers. The banks throughout 
Kngland find it much more convenient to deposit their 
cash in the l>ank of England. Xo interest is i)aid on 
these deposits but the banks continue to make them be- 
cause of the right it gives them to draw on the city 
I'anks. The result of this system of concentrating th<« 
cash ui one bank is to place upon the IJank of Englan.l 
the responsibility of holding the cash funds of the entire 
country not in active circulation, ^^'hcn there is an 
extraordinary demand for any reason, such as with- 
drawal of deposits by individuals and firms in time of 
panic, that demand is transmitted from one bank to 
another until it finally reaches the Bank of England. 
For this reason the IJank of England must i<eep'"itself 
m a position to linance such occurrences, and it does so 
by keeping a large cash reserve. It has learned from 
experience that a 40 i)er cent reserve is necessarv, and 
this it aims to kee{) at all times. Its de^ ice for keeping 
Its reserve intact is the d.eount rate. It selects the 
most urgent cases for relief automatically bv raising 
the rate at which it will discount paper. This 
ately restricts loans. When the reserve piles up in ex- 
<vss of what is needed the bank encourages loans by 
Imvering the -ate. This is the principle ,ipon whi,.), 
l"nis are made (.. the world ov( r, btil because of the 
■ mporlancc of the Hank of Ktigland its discount rate 
IS watched carefully, even i.i this country, as a barom- 
< ter of financial cnrwlitinnu 

VM. Ihnihing in France— '\:\\<i earliest attempt to 

t — \ II ji; * 









estaulish a central bank of issue in France was made 
l>y John Law in 171(5. Tiie bank was well conceived 
and tor a time was ably mana^rcd, bnt it finally became 
involved witii Law's specnk.tive schemes and went into 
li(inidation in 17'21. The panic which marked the end 
of Law's career was so severe that for lifty years there 
was no further att'Mnpt to establish a "^real national 
l)ank In 1770 the Bank of Commercia! Discount was 
organized only to receive its death blow at the hands 
of the government in 1789. During- its i)rief existence 
;fr was well managed and gave excellent service. Tiie 
gnvtrnment, however, found that its own creciit was 
unstable, and in an effort to repair it dragged the bank 
down with it. The climax occurred when the gov ,'rn- 
nient ordered tlu' bank to pay into the Treasury a large 
sum in notes in return for worthless assignats. In 1703 
the bank went into licjuidation. 

4".).>. liiuih- of France. — The Bank of France was 
foutided by Xapoleon in 1800 with a capital of .30,000,- 
000 francs. At the outset it had no special nrivileges 
in regard to the issue of notes, nor was it a government 
institution in any sense. In 180;j the capital was raised 
to 45,000,000 francs, and it was given the exclusive 
right of issue in Paris. In 1H()(; the capital was furtiier 
incieased 1o !K),000,tOO francs and the present system of 
government was ado[)ted. 

I'nder this .system a governor and two deputy gov- 
ernors an api)ointed by the state. These othcials must 
l)e stockholders. 'I'liere is also a board of fifteen re- 
gents chosen by the stockholders, but the governor pre- 
sides ov(r this board and has general supervision of 
loans and all bank affaii's. 

.. »l... 

■•:r!-.» -•.*' 


issue in all towns in which it had branches. During 

'f '^ 



the years following the fall of Napoleon its influeiiee 
waned somewhat in favor of the establishment of de- 
partmental l)ank«,. A laroe nnml)er of these were es- 
tahhshed between 1830 and 1840 as the resnlt of the 
!>ehef that the liank of France was not properly or- 
■iani'/ed to administer the banking affairs of the average 
citizen. It was popnlarly beheved to be a bankers' 
hank. The nnnvtii of the (lei)artmentai banks soon re- 
sulted in a spirited contest with the IJank of France, 
the main [joint at issue bein^' whether the privilege 
oi' note issne should be confined to tlie one bank 
<ir bestowed ni)on all. The final resnlt was the Act 
ul' 1848 which nave to the JJank of l-'rance a monop- 
oly of th.e note issne function. It was re(]uired, how- 
ever, that the i)ank should buy out the dej)artmcnt;d 
l)anks of issue, which it promptly did by increasi.Mn- its 
own capital stock. 

VM\. Dcposi! nirrcucii little'd.—'Vhv monopoly of 
till' note issue function did not result in buildino- uj) 
ureat banks of deposit in France as it did in Kri'dand. 
One of the most intcrestin^r features of the French 
system is the undeveloped condition of the deposit cur- 
rency. \otes are used almost cntncly in lar^e trans- 
actior.s as well as in the channels of small trade. The 
confinement of the privilenrf of uoh- issue to the one 
•ii-eat institution has <«iviji to France a uniform, stable 
I urrency against which tinn is little com|)laint and be- 
cause of which there seems to be no nccessitv for the 
_;ro\\ th of deposit b;uikin^'. 

41t7. ./.v.v</ (iintiif/i. The notes of the Hank of 

Trance are issued on what is known as the bjuikin^'' or 

"asset currency" plan. In other words, there is no spe- 

'liic iutid set aside for their rciCmption. such as is pro- 

\Kled l»y the Fn>^r|isli law ;uid by the National Hank Act 






of the I/nited States. The vohnne of notes outstanding 
is fixed solely by the needs of business and by tlie eash 
reserves whieh the bank thinks it neeessary to keep to 
redeem the notes. Under this plan bank notes are 
treated just as deposits are treated in national banking 
law — as demand obliuations of the bank against the re- 
demption of whieh a reasonable eash reserve should be 

In })ractice tiie amount of notes against whieli ati 
e(iui\alent amount of eash is not held is relatively small. 
iVIthough the Hank of Franee is not re((uired to {)ro- 
vide any speeitie reserve it has found it advisable to 
kee[) a very large one, mueh larger than Me eonsider 
neeessai-y in this eountry. The reserve of the IJank of 
Franee will average about 60 per cent of its circulation 
and consists of gold and silver eo' 

408. linniclii'.s.- 'i'he bank is recjuired to maintain 
one branc'ii in every department in Franee. Each 
branch is allotted a certain aniount of the capital, and 
the law re(iuires that half the ca{)ital shall be held 
locally. The total cai)it:d is at present 1H(),()()(),(K)() 
francs, or a|)pro\imately S.'}(>, ()()(),()()(). Loans are made 
by till' branches as well as at the central institution, 
and at the same I'atc of interest. It is worthy of note 
that the l)ank oftin loans in very small sums, running 
down to a few francs. The bank also does a large 
amomit of re-discounting, the small institutions 
tlu-oughiiut l-'iancc accc pting paper with the intention 
ot' passing it on ai a small piolit to the central bank. 

The liank (y\' I'liglatid issues notes onlv agamst the 
deposit of gold with the issue deparinu lit ; ilie Hank 
of I''rance issues them without any restriction whatever 
except iiiose iiiij)osed i»\ its o\\ n couseix atism. it is 
evident that tiie latti r nu thod, although it may not ap- 


pear on its face to be as safe, o-ives to the currency the 
iinieh needed attribute of elasticity. The Kuulisli sys- 
tem is notably inelastic. The volume of out^standin^r 
notes can be increased only by the purchase and deposit 
<»r <4old, a method both slow and expensive. As we 
have seen, the rigidity of the system has caused the 
MTowth of the deposit currency, the l)ank note losing 
entu-ely its true function as a credit instrument. Eng- 
l.ind's only resource in time of acute strin«rency is the 
suspension of the bank act, which in itself is an" admis- 
sion that the system is incorrect in principle. Jn France 
unrestricted issue has allowed the bank note to retain 
its true character and its im])ortance as a medium of 
exchano-e. The system is elastic, the vohnne of the 
(iieulat.on ex])andinu- juid contractin^r as the demand 
for it changes. Although there are no reserve recpiire- 
nients the same result has been accomplished by con- 
^eI•vative numagement, so that the note of the Hank of 
I'lanee has Ijcconie as readily acceptabk- as the liank 
«•!' Kngland's gold certificate. The law fixes a maxi- 
mum limit to the circulation of the Hank of France, liut 
this is changed from time to time so that it always ex- 
ceeds any j)ossible need. 

The (|uestion as to which is the betfir system, Imw- 
cver, camiof be considered here because it goes far 
Ixyond the merits of the two j)Ians of note issue. In 
Imal analysis it would be foimd to de|)end uj)on which 
s\stem that of perfornniig exclangis with bank notes 
i'V with the deposit currency -would be most economical 
.■mil best suited to the needs of a given country. Even 
lliin final (hrision of the question must be largelv of 
aradenu'c value, for the century-h)ng habits of nations 

^ cl« I I I > \ I l€l I I J; t 1 I , 

\ KrioV\ iftim- oj ijic uruier 


lying principles, however, setting forth the t 

\\t» li 




r-'. f? 

schools of hankiIl^^ is extremely valuable to anyone who 
is interested in the unsettled hanking- problems of the 
I.^nited States. France and Kn^land have each ^iven 
to the world s})len(li(l examples of conservative, upright 
banking which stand as monuments to the ability of 
their citizens to conduct private enterprises in the inter- 
ests of the pu])lic welfare. 

4f)i). Imperial Hank of (rcnnaiii/.—Thv Imperial 
liankof Ciermany, or Heichsbank, was founded in 187.5. 
Its organizatio)! was one of the measures adoj)te(I by 
liismarek to bring order out of the monetary chaos that 
had existed in the (German states prior to the unification 
of the empire. Together with other monetary and 
banking reforms it was made possible largely by the 
huge war indenuiity of 5*^1, OOO.OOO. ()()() which (iermany 
collected from France. In IHT.'i the gold standard was 
adopted, and the mark made the unit of value in place 
of the thaler. 

The Imperial liank Mas organized upon the founda- 
tions of the Hank of Prussia, established a century 
earlier. This bank was owned j)rivately but was con- 
trolled by the Prussian (iovernmetit. The Imperial 
(io\ernmeii', purchased the Prussian interest, raised tht 
cai)ital from i>0,()()0.(»()0 t balers lo 1 •_'(),()()(),()()() marks, 
and sold the stock to private interests. 

')()(). lufhicucc of ij;ovcntmcuL Although the gov- 
ernment is not a stockholder it exercises direct control 
over the l»ank"s iiffairs, so that it is much more essen- 
tially a govtrnuKiit institution than arc the banks of 
Kngland and France. Tlse Chancellor of the Empin 
is the gtnerning olHcer. Associated with him are four 
directors, ofic named l)y the Kmperor, and the others 
lt\ till- l''cd(ral Council. 'I'he stockholders elect annu- 
ally a commission of fiftcdi members which act> in an 



advisory capacity but has no real control of the bank's 

The bank acts as fiscal agent for the government 
without pay; and furthermore, the stockliolders share 
tlie profits with the government. First, a dividend of 
31/2 per cent is paid to the stockholders; second, one- 
fifth of the balance goes into the bank's surplus; tliird, 
tlie stockliolders and the government then share e(iually 
until the stockholders have received 8 per cent, after 
wliich the government receives the remainder. 

.501. Modeled on Bank of England.— The regula- 
tions in regard to the issue of notes were modeled upon 
the laws of Enghuul witli certain modifications which 
liave been very useful. Tlie Ueichsbank was given a 
circulation of 2.50,000,000 marks, with the further pro- 
vision that M-hen other note-issuing banks (of which 
there were then thirty-two) gave up the privilege, the 
Reichsbank might increase its issue in like amount. At 
present only six banks still issue notes, so that the circu- 
lation of the Reichsbank has been considerably increased, 
its capital was increased in 1905 to 180,000,000 marks, 
and it now has .320 branches. 

;502. 7i*r.srnY'.s'.— The Reichsbank is recjuired to keep 
a cash rcsei've of one-third of its circulation, two-thirds 
being secured by first-class commercial paper maturing 
within ninety days. It is evident that this provision 
renders the currency much more elastic than that of 
Kngland where the cash reserve must be 100 per cent. 
Furthermore, the Reichsbank is entitled to exceed the 
limit set for the amount of no..^ it can issue iiy l)aying 
a tax of .5 per cent per aruium upon all circulation 
above the maximum limit. This creates :i circulation 
th.'it can be used in emergencies without the necessitv 
of suspending the limit l)y special enactment, as Kng- 





»: 'J 

land is compc-UtHl to do. Tliis plan has been incor- 
I)oi-atcd into a number of the systems whieh have been 
su^iroested lor adoi)tion in the Cnited States. 

It is worthy of note that no speeial fund is set aside 
for bank note redemption. In case of dissolution the 
depositors and note holders would be in the same posi- 
tion. The deposit currency, however, has not grown 
greatly in (iermany, so that the note holders would 
always be the chief creditors. The system has worked 
out very well in practice. The notes have always cir- 
culated freely and without discount. The bailk has 
followed the |)rece(lent of the Bank of Enoland and 
the Bank of France, and conducts its affairs on a very 
conservative basis, maintaining, like the Bank of 
France, an average reserve of <)() per cent of its circu- 
lation. In its conservatism it is very like both its pred- 
ecessors; in its plan of note issue it seems to have taken 
a middle ground between the two older schools, adoj)t- 
ing many of the good points of each; but in its manage- 
ment it has de|)arted entirely froni the other institutions 
in that its control is entirely in the hands of the Imperial 

' Much v.iliial)!,- iiit'orinati,.ii cnnccrniiig I'.uni|..-;m l.,inkinL' svst.-ms is 
<-;'iilMin,-<l iM thf tnoncijrr.-.plis puhlish,,! I,y th.. Xation.-il Monrt.irv' C'o.iiinis- 
Mon I icsc „i,-.y l)f (.l)taiiR-ii from th.' SMiHTinl.'ihl.Mit ..f niHumi'iits, 
W ashinjitiiii, I), e'. 




50.3. Origin of banking in Canada. — Wherever a sys- 
Irm of banking has been cstaljh.shed history of some sort 
lii's behind it. Tlie aphorism: "Ilappx are the people 
wbo have no liistory" may well be doubted; and espe- 
;ially is this true in the held of commeree and finanee. 
Tbe experiences, even the failures of the past, prepare 
the way for the foundation of the nrcsent. xVlthou<di 
Canada is as yet merely a new country, a country in 
the makiiifT, it has had a lon<»- historv not onlv in the 
|)olitical but also in the financial field. The history of 
her currency, whicli beoan in 1()8.5 with the issue of 
fiat money during the French regime, has already been 
considered, as well as the early IJritish experiments. 

The need of better financial facihties was early felt in 
Canada. This was especially true after the Army Bills 
issued in 181 2-1 81 4 had been withdrawn from circula- 
tion. Therefore in 1817 and in the following year, 1818, 
private banking corporations were established in Lower 
Canada, now the Province of Quehec. These institu- 
tions obtained provincial charters in 1821. to which the 
loyal assent, then necessary, was given in 1822. Upper 
Canada, now the l^rovince of Ontario, was asked in 
!S17 to grant a charter to a banking comj)any. This 
was done, but the lieutenant-governor reserved the bill 
lor royal assent, which was given in 1821. A fierce dis- 
pute arose l)etween the ])olitica! factions of the j)rovii,ee 
over this measure, which e\entually led to the govern- 





K ; 

ment itself taking about one-fourth of the stock of the 
institution, with tlie rioiit to name four out of fifteen 
directors. Tliis is the only instance, fortunately, of state 
ownership in Canadian ba..".jig history. 

In the maritime provinces, which became part of the 
Dominion of Canada in 18G7, tlie first efforts to estal)- 
lish banks was made in Xova Scotia in 1801 and again 
in 1811. In 1812 the provincial governme it of that 
colony brouojit out an issue of treasuiy notes, bearin<; 
interest and not subject to re-issue, liut this was fol- 
lowed by notes which bore no interest and were re-issu- 
able. From this time on until confederation, the prov- 
ince continued to issue treasury notes. Sometimes they 
were made redeemable in gold and sometimes not. In 
1807 there were in circulation notes to the value of 
c£()0.5.859 (Halifax currency) . They, together with the 
issue of 1800 of the Province of Canada, formed the 
basis of the present legal-tender issues of the Dominion. 
Xo bank was started in Xova Scotia until 182.3, doubt- 
less because of the existence of the government treasury 
notes. This was a i)rivate bank and remained so until 
1872. The first joint-stock bank was not created until 
1872; although in the sister Province of Xew Brunswick 
royal assent was given to a charter for a bank in 1820. 
o04. TJw mhslnictnrc of the Canadian hanking sys- 
tem.— \\. is maintained by Dr. Adam Shortt, the fore- 
most authority in Canada, that the three charters granted 
in Lower Canada—all practically alike— are the sub- 
structure on which the present system has l)een built. 
This is now generally acknowledged ; for during the past 
century no very radical changes have been made. In- 
deed, there are many provisions in these charters which 
remain, almost unchanged, in the ])resent general Bank- 
mg Act. Among these i)rovisions, which are essen- 



tially the same in principle, aitliough diH'ering in de- 
tail, are the following: 

1. The charter was to continue in force for ten years. 

2. Tlie directors were to be liritisii snbjects. Tiie 
qnalification in stockholding was small, namely, four 
shares of £50 currency each, or -$1,000 jjar \alue. The 
directors were to he remunerated by compensation voted 
by shareliolders at an annual meeting only. 

li. The directors were to appoint officers of the bank 
and to take surety bonds for faithful i)erf()rmance of 
duties. They were to declare dividends half-yearly, if 
sufficient pi-oHts were earned. They were enjoined, in 
paying dividends, from encroaching uj)on the capital. 
They had the right to inspect all ))ooks, correspondence 
and funds of the l)ank. They were obliged to submit 
a clear annual statement of the bank's position to the 
shareholders at the annual meeting. 

4. The bank might receive deposits, deal in bills of 
exchange, discount notes, buy gold and silver coin and 
bullion, etc., but miglit not engage in any other business 
than tlijit of banking. 

5. The bank could not lend money directly upon real 
property. It could, however, take such ])i-operty as ad- 
ditional security for loans already made. It was not 
j^ermitted to lend money to a foi-eign countrv. 

C. The bank could issue notes to circulate as nionev. 
but with, no limit of amount other than the general limit 
for cdl obligations. The limitations at the present time, 
as will be seen, are (jnite different. 

7. The government might require, at any time, for 
the ])rotection of the public, a statement, under oath, 
of th.e i)Osit!(^n. of the bHn.k. 

8. Transfers of shares in the bank were not valid \in- 
less registered in the stock-book of the bank. Moreover, 







the btuik had a prior lien on the stock, for ordinary debts 
d;ie hy tiie holder to the com})any. 

There were, however, reowlations diflerinfr in prin- 
ciple from those in the ^nneral act now in force. These 
may be briefly siimmarized as follows: 

1. The total liabilities were not to exceed three times 
the capital stock actnally paid in. Directors were made 
personally liable if they })ermitted any excess above the 
stipulated amount. Any di:oetor, however, mi<rht es- 
cape liability by publicly protesting, within eight days, 
after the transactions causing the excess took place. 

2. Shareholders were responsible only for the amount 
of the stock for which they had subscribed, althouuh they 
were subject to a j)enalty of five per cent for non-pay- 
ment of instalments at maturity. 

a. The voting power of shareholders M-as not, as now, 
in exact proT)orti()ii to the shares held, but the number of 
votes diminished relatively to the shares held. Vor 
example, one share gave one vote, ten shares gave five 
votes, and thirty shares ten votes. No lu)iding gave 
more than twenty votes. 

The banks soon established branches and agencies, and 
Canadian banking began its career. Tluy issued notes 
unsecured by any special pledge and exercised the widest 
functions of banking without ])i-ecise reference to the 
pow(rs conferred upon them by t.heir several charters. 
They possessed capital (piite r.s huge, relativeiv to popu- 
lation, as they now have: and as a result they assmned 
a commanding position as ;i clearing-house for the ex- 
change of the country's j)rodiicts. 

Of these banks— three ir; Lower Canada, one in. 
Tapper Canada, two in Nova Scotia .ind one in Vpwr 
Hninswick— all but one in Quebec l)ecame leadmg in- 
stitutions. They are, moreover, all in high standing to- 



(lay or have been honorably absorbed by existing banks, 
exeept tlie institution in l/pper Canada nhidi, unbap- 
l)i!y, became involved in {lolities. It failed in I8GG and 
wrought untold misery- to the whole province. 

The extent of the country served by the banks was 
very great, but the trade and i)opulation were small, 
almost insignificant. 'J'lie i)opulation was settled along 
the shores of the sea, the lakes and the rivers; and means 
of communication was almost entirely by water. Farm- 
ing was in a backward state; as exports, furs and timber 
were more important than those of agi-ieulture. As a 
natural result the development of banking lacks interest 
until a much later period. 

In Lower Canada the volume of business more than 
doubled between 1820 and 1^30. The liabilities were 
made up as follows: Capital, .£3()4,()00; notes in circu- 
lation, £217,000; deposits, £lG.*3,000. Other items made 
the aggregate a little more than £700,000 currency. 
The assets were as follows: Loans, £()02.000; cash on 
hand, £103.000. In the same jear the one bank in 
Upper Canada showed liabilities as follows: Cubital, 
£77,000; notes in circulation, £150,000; deposits and 
other bank debts, £38.000. The assets were: Loans, 
£214,000; cash, £23,000; other assets, £30,000. 

There were several new features added to ])anking in 
this peiiod, which have survived in a more or less modi- 
t\td form to the present. These were: 

1. The principle establi.shed in Upper Canada that 
a bank coul;l buy real estate only for its own use. Tn 
Lower Canada there was a provision in the charttis 
niaking it compulsory to state the animal value of the 
real estate held. 

2. Inal)illty to pay notes in specie on demand, forced 
a bank into liquidation. 



it .. - 

Vx. \i 




\ 1 

3. In Xova Scotia the double liability of shareholders 
was introduced; althou^rh this did not as yet exist in the 
provinces of Canada. 

4. In New Brunswick the folloM-ing leatures were 
added : 

(a) Xo bank notes to be issued until one-half the 
authorized capital was paid in. 

(b) Loans on pledge of the bank's own stock were 

During the ten years preceding the union of Upper 
and Lower Canada more than a score of bills were in- 
troduced deahng with novel ideas in banking, mostly 
based on experiments in the United States. FortunatJ- 
ly, as these measures had to be referred to the Colonial 
Office for royal assent, they were vetoed. Xotwithstand- 
ing the severe criticism of the imperial authorities at the 
time, it is now recognized that they were right in re- 
fusing to give their consent to 'these hare-braine(i 

Thus far, .,o joint-stock bank had failed, although 
when the country was distracted by the Re})e]li()n of 

1837, it was found necessary by the government to per- 
nut the banks to suspend specie payments. This was 
'liie not only to political disturbances, but to the great 
I'Mi.ic in the same year in New York. Previous to 
tiiat time the b. nkers had never failed to pay their notes 
on demand. Soon after, however, the banks again re- 
sumed specie payments. 

^ The union of the tw„ provinces of Tapper and Lower 
Canada in IHIl cmphasi/cd tlu- importanrr nf uniform- 
ity in b.-mking. A committee on banking and currency 
was app(,int(d, which reported upon crtiiin banking' 
];: riK-ipk.s. Tiitr uiuy niw and important departure was 



the restriction of note issues to an amount not greater 
than the paid-up r.ipital. 

There were no new important 'lepartiu'es up to Con- 
federation in 1S(»7. exce[)t the issue oC govennnent })aj)er 
money in ISGO, ah'eady deserihed, and the Free IJank- 
iii^- Act passed nearly a generation before, in 1850. The 
C anadian provinces were tlien. as now, carrying on hank- 
ing through a few institutions with hu-ge capital, with 
luiHiches and a hank-note currency based on general as- 
sets. In tlie State of New \'()rk, just across the border, 
I lie opposite policy was in effect. There were established 
l);uiks with small cajjital, no branclu s, and a s})ecially 
secured note circulation based on i)OTi(ls of various kinds. 
The Canadian banks had done well, and come through 
many trying times without failure; but their pace was too 
slow for the public. And so "An Act to Establish Free- 
dom of Banking" in Tpper Canada was passed. It was 
intended to create small banks without branches and 
\\ith bank note, based on the securities of the province, 
lint the ])lan did not work. The largest amount of notes 
takeii o:it under the act was, as re})orted late in 18,').5, 
L."{()i),.)40; after that there was a steady diminution in 
the note issues. The law, however, was not rejjealed 
until 18<>r). 

The reasons for the failure of the free l)anks are not to seek. The banks could make more money under 
the old system. The capital gathered togetlu r in .-uiy 
eommi iiity to start a bank was forthwith sent away 
tn buy the bonds as an initial deposit against tiotcs. The 
proprietors, to I)e sure, secured the ru>tis: l)ut. except 
for the small iterest yield on the bonds, they were ex- 
actly in the stmc position with respect ir the amount of 
loanable funds as they Mere iK-fore. 

Moreover, they were obliged thenceforth to keep an 







office I'or (liscoiiiit and dcijosit, and to he ready at all 
times to pay specie whenever tl.e notes were presented 
tor i)aynient. On ihe other hand, the cliartered hanks 
issued notes against tiieir _yeneral cre(ht, and so had 
control of their ori^ri^al capital and oi' the resources 
arisino- from wiiatever {)ortion of their authorized note 
issue they could keep In circulation. I'pon this general 
loan fund they could earn the current discount rate, 
and whatever additional yains were incidental to hank- 
in.y operations in their territory. It can thus he readily 
seen that the (iiartered hank was the more etJicient iii- 
striiment hoth for the advantage of the stockholders 
and for the community as a whole. And l)ein<r such, 
it sur\i\cd. 

.>().). Hnision of the ffcncrnl hnnlhi^ measure of JS7!. 
— Enough has now Ikxh said, perjiaps, to make it clear 
that the present Canadian l.anking system owes its origin 
to the early l)aidsing c\j)erin.ents of the several prov- 
inces. Limits of space will not permit of a detailed ex- 
position of hatddng legislation from coid'ederatior. to 
the i)resent time: nor, indeed, is it necessary. The act 
now in force is merely a revision of the general hankitig 
measure of 1H71, (he first hai.K act of the Dominion 
under which the hanks actually worked (;U \"w[., c. .')). 
Tlie first decennial revision of the act look place in 1880. 
A decade later, in 1H!>0, the act was suhjected to im- 
portant amendments which placed it snhsfantially in the 
form with which wc arc now familiar. Again in 11)00 
several imi)ortant changes were made. All these modi- 
fications, however, in so far as they hear ujion the system 
as it rxisfs fo-day. may he in s| d( sciJIh.I Ji, ;,r. analysis 
of the act as it was last rr\ iscd in !1)i;{. 

.'}()(). luvnrporali,,,, (,f hanks. - The p?-ovisions of the 
bunk act witli respect (o the incorporation of wvw hanks 



are iiitciuled to ^nard aQains*^ the entry of unfit or iiie.x- 
j)erienee(l persons into tlie bankin^r business. With this 
end in view it is provided that the niininiuni re(|uired 
eapital shall be .%}()().()()(), ol' whi.-li ofie-huU' must be 
hdiia fide paid in and all subseribed btt'oiv a eertifieate 
( an bf seeui'ed I Voni the Treasury IJoard pei-niittin^- the 
institution to be<4in business. Xo eertifieate can be 
f^ranted by the I'l'iasury Hoard uidess it has been shown 
that all the re(iuirenients of the act as to the subscription 
(»f capital stock, fhe ])ayinents of money by subserilK'rs 
on account of theii- sul)scriptions. the i)ayments reciuired 
to be nuuK' to tlie minister ol' finance, the eleciion of di- 
rectors, deposit for security of note issue, and all other 
j)reliminaries have been compiird with. It also must be 
made cleai- to the board that tiir e\])('nses of incorpora- 
tion and oruanizatioii aic i-( ason;'ble. 'I'his board con- 
sists of the nn'nistcr of finance and five other members 
nominated fi'om time to time by the •^'overnor-in-coun- 
lil. The minister of financt.' is clu-irman of tin board, 
and the deputy ministci' is. cx-ollicio. the secretary. 

The prcliminai'y re(]uiremcnt riiakc it impossible to 
(u-<^ani/,e a b;nik in Canada w itii any d( yicc of secrecy. 
The aj)phcation for a new chartir is soon known toevcrv 
liaidxcr in the Dominion. The scei'elarv of the Cana- 
dian Hankers" Association, although not re(|uii"ed to do 
so by law, at once ^'ets toL>«tlier all pos^ibK" information 
ill connection with the new entei'prise. He mav cvet\ 
(liter into u?io(licial eommiinieation with the yo\crnmcnt. 
and in various ways h( Ip to ni ike it certain that the new 
^(M)turc is conducted as a hmic fide bu^.iness. It is thus 
readily seen flial. as a rule, only b.niks which lia\c allied 
proper financial backing- ha\t' a chance to enter the Held 

I. I '.■ 


."iOT- The l)r(i!iiJi Jtinifi s/ in. As Dean .lo.seph 

e-vii— ,>7 



r'rt'iich .loIiMsoii lias so fittingly said, a chartered bank 
in Canada is a hank of liraneiies. not a bank a\ ith 
branches. Tlie jiarent bank, wliieh is known as the 
"bead olTiee." neither takes deposits nor makes loans. 
It is merely an a(hninisli-ati\ e center. All the bank- 
in^' business is (hmc by the branches, each of which en- 
joys considerable inde|.en(lenee. Tliey are all. however, 
subject to the control of the bead office. The law jjlaces 
no restriction ujion the number or location of branches. 
Canadian baidxS. therefore. 1ki\c b'-anchrs and agencies 
in man\ I'orcinii countries as well as in Canada. That 
this IS of \(ry ureat advantage to the commerce and 
ti'ade of Canada (an be easily se- v Tiicre are at the 
present time ( I'.MM) almost .'{.(MM) .anches of the Cana- 
dian banks at home and abroad. 

The inducement to the establishment of branches by 
banks is. of comse. the possibility of j)rolit. Hut piotits 
can be made only by making- 1,,; i^. 'll^v^^- |,,;,,,.s nnist 
i)e made litlu r by issuin-.- circulating- nolcs or bv oprnin<r 
an account uilh the bank. It is clear that were the 
possibilities of |o:uiin,u- beyond the amount of the capital 
wholly or ebiclly »-outincd to one of three forms of liabil- 
ity, and w( re the other form distasteful or imjmssible of 
introduction amon<>- th,. eonimumty ubere the branch 
uas to be ( stablished. the m..ti\r for the creation of the 
l)raneh would be absent. \ow, in anrieultural commu- 
nities in Canada, win re popidntion is coniparativch- 
sparse, the use of diposit-cuiicncy has not bc'n devcj- 
oped. in Iced, the eon.btioiis aiv such t|,;,t tin \- would 
scarcely admit of its use. \Vv liaNe. indetd. "a g'reat 
number of small communities which -.ould be (nfirdv 
iinabh- to support independent banks >f small capital, 
communities \vhieb <!e!>!:!n!! •!!:■!■• :-t--i-:.z,f,^ :-.. n. 

II till 1 1 1 1 1 1 

oi' notes, not in that of deposits. The tHcd for note 



iiirrcTicy, nioirovei-, in tlu'st- localities is not constant. 
Iiiit is manifest only at certain seasons of the year. 
WJKii the (leiiiand becomes intense, at the period of 
iiiovino- the eiops. cnrreney mnst he su])plie(l (piicklv 
,111(1 at reasonable I'ates. It is jnst here that the llexihil- 
it\ and the elasticity of the branch bankino' system of 
( aiiada are most in e\ idence. In every ])ioneer com- 
iiiiiiiity and in the farthest frcMitier the bank is almost 
I he lii'^t instrununt of ei\ ili/ation to ser\e the commn- 

oOH. Conditidns' of nnfc issue. — Tender ordinary cir- 
cumstances the total amount of notes in circulation at 
any time may not exceed the amount of the nnim])aired 
paid-u]) capital of the bank to^xther with the amount «)f 
ciin-ent yold coin and of Dominion notes held for the 
hank in the central ^(Ad reserves, hereafter to be (K - 
scribed. 'J'his lattei ])i'o\ ision was added in the revision 
• if the act in 1!>1.'}. An amendment to the act passed in 
]'M)H ])i-ovi<!es for the issue of what may be termed an 
emcr^-ency circulation. This issue is restricted to the 
(•rop-mo\ inn- pei-iod ( Sc})tember 1st to end of February 
loljowinn). I)u!'in^' that time a bank may issue, in 
addition to its ordinary circulation, an amount ecjnal to 
1") jier cent of it> combined paid-up capital and sur])lus 
<ir rest fund. This issue consists of notes which in all 
respects resemble the ordinary ciieulation of the bank. 
It is subject to a tax, not to exceed .1 per cent of the 
iiiiount outstanding", until the notes are retii-ed. 

.")()'.». (^nifididii lifivk nolis hascd oil com incrclal itsscfs. 

Tile notes of Canadian banks, with tju' exception of 
those that arc issued dollar for dollar on i^old or le^al 
irnders deposited in the central reserves, arc based n|)on 
ihc <^eneral a<s< ts oi i!ie iiafiivs. "iiiis forms a wonder- 
lully clastic tnedinm of exchati^c. expanding and con- 





(rac'tiiio- ahiiost auloiiKitifally. TIk'sc notes, hciii.^- Imscd 
simply on the general assets of the banks. Irvoiiu'. midfr 
tlk'sc circunistanccs. similar to deposits. Tlicy arc issncd 
on demand from li'<^itimate l)()rrouers and they automat- 
ically conti-act I'y l.cin<4' rctnrncd when the need for IIk 
enrrency is past. Cnder sneh a system any increase in 
the demand for money, with higher (hsconnt rates, adds 
to the indncemeiit to issne notes. There is no delav or 
inconvenience sneh as exists where-- as in the Cniled 
.States— honds mnst he i)nrchase(l and dei)osited with 
the n(,\crnnient het'ore ilic notes can he issned. The as- 
sets on which the notes are i)ased are the ordinary com- 
mei'ciai i)aper ac(|nn-ed hy the hank in the coin'se of its 
re-nlar hnsiness. The l)ank is tlins always ready to 
inci-ease its circniation If the puhlic need more notes; 
and all considerations oT |)i()lit lead it to do so. as its 
power to lend money will he increased in projxjrtion as 
it is able to snpply notes when that is the kind of ac- 
conimodation re«|nired. 'I'he motive of profit, too. brings 
the banks into active competition with one another, cans- 
in,o- them to redeem promj)tly all notes of other institn- 
tions which are |)aiil into tluin. and in liiu of these 
to place their own enrrency in circniation. And a 
sonnder or more li(|nid secnrity. as ;i basis foi- note issues, 
than o(),)d, short-time commercial paper can hardly l)e 

."ilO. 77/(' cciifnd ■^(,l(f /T.vcnr.v.— The provision for the 
(stablishiiK nt of central <4o|d reser\cs was the most 
iniportant new fealnrc ad(' d to Canada's bankin^' sys- 
tem by the legislation of l!»l.*{. These reservi-s will mi- 
doubtedly exert a potent inllnence not oidv in times of 
stres.s bnt the whole y, ar jnound. As already indicated, 
::;-. :;.:;;;,-, ;i;i.:; i ir;r oiii ,;•; T Vm j ( ai)i^' io issue iiieir notes 
to th<- ext<i!t of their iinim])aired paiil-up capital stock 

CANADIAX r.ANKiN(; s^■s'^l:M 



(1 Itcyoiul that ( Sfptiinbcr 1 to l-'thniarv 'iS i to tlic 
liiiouiit ol" 1.") j)C'r cent of tlicir capital and surplus or 
list funds. According- to the (luarti'i-jy statement of 
April .'{<), 1!>1.'J. the paid-uj) capital of tlic hanks was 
-^1 I.j.7t>'.>.217, and the rest {()>• sur|)lus) ainountt'd to 
si(lS.41 k.'i.'JT, a total of Ji^-22t.-21.'i,.).)4, The emoro-ency 
ciiTuIation dui'inn' the autumn and uintc'i- of I!) 12-1;) I. 'J 
!iii,i>lit, thci'eforc. if necessary, haw reached somewhat 
(»\er .'}•') million dollars. In Xoveniher. l'.H*_*. the emer- 
yency cii'culation actually approached SIO.OOO.OOO. and 
the margin of such circulation .> mailable at that time was 
ahout -S-JO.OOO.OOO. At ordinarx times that mar«rin 
v\()id(l he am|)le-. hut it is easily seen that cii-cumstances 
may ai'isc where such a mar/^in would he w i|)e(| out. .Vt 
^ueh a time of (huiuer a comi)arati\ely insiy'uiticant 
ution may stai't a panic, or a run on a hank. ^Vt the 
I nd of April. IDl.'J, the (ie])osits ])ayahle on (Kiiiand in 
Canada were S.'i(!.).34().()()2. and after notice. !^(i.'Jl.l(>(),- 
I'SO a total of Sl)tM;..)()().2S'J. In Xoveniher. 1!H2. a 
month when the ))ressure is usually <4i'eatest. the dej)osits 
were -$1 (».(»()(),()()(> higher. To nuct a run on such a lar<^e 
jiiiiount a good deal more than S2(),0()(),()()() might be 

The new provision does much to econoi i/e time and 
liring j)rompt I'elief. T'irst of ;dl. a goxti'imicnt depait- 
iiient is eliminated. ()f necissity. there would need to 
lie a laj)se of time to plact' go\ci'nmental maehiiirrv in 
motion, as is e\ ideiil now in the time needed to secure 
l)ominion legal tcndci's. Again, if recourse is had to 
uojd imports, there is delay in secuiiiig then), and incon- 
\eiiience in rel( asing the gold \\lien oner the jiced is 
o\-er. Hut by pooling theii- gold res(!urces in a eeiiti'al 
ieser\(' the hanks can imme<hately rtccixe additional 
'iiodation in the form of notes, and still retain control 







oT their rcser\cs. It .should hi' lirfc (.■\i)hiiiRd th;tt. 
Mhilc the C';ma<]i;iii l)aiik note is not a le^al teiidrr. it is 
c'oiisidemi ahsohitcly .safe hy the puhhc heeause of the 
safen-uards [)roteetiiio' the holder from imnieihate or 
ultimate loss. These j)ro\ isions will he enumerated di- 
rectly hi'low. 

However, apart from crisis, the central ,n(,ld re- 
serves are expected to serve an important i)nrj)ose in 
normal times. During- recent years hank-note issues 
have fre(]uently ai)i)roached very near to the limit author- 
ized hetween Septemher 1st and the end of the following' 
Fehniarv. For instance, in .June, 1!»12. the circulation 
was within «•_'.()()().()()() ,,f the circulation in Septemher, 
when the emer<4ency clause comes into operation. .\t 
such times a «i-reat deal of anxiety was caused the hankers 
lest tile authorized limit should he reached: for tlun the 
only recourse was to issue Dominion notes either !)y tak- 
ing- them from their reserves or hy securin<r new sujjplies 
from the ^rovernment— the latter expedient takino- some 
time, while the former was a dangerous policy to j)ursue. 
Under the new system any amount of hank notes may he 
held in reserve to he released instantaneously hy the de- 
])osit of ^'old or Dominion ^jovernment notes in the cen- 
tral reserves. It is ex|)ected that the I)anks will keep 
])ermanently a considerahle part of their ^(,1,1 imd leoal 
tenders in the central reserves, so that in eflVct the eii- 
culation will he permanently extended. The ^rold and 
notes so deposited, which !nay l)e in excess of the amount 
needed to cover the tiote issues of a hank, may he with- 
drawn at any tinu after ii proper statement has been 
rendered hv the hank in (|uestion. 

The Canadian li.-mkers' Association, witli the ap- 
proval of tlie ruiiiistci ttf i'iiiaiKv. appoints three trustees, 
and the minister a fourth, to liave charge of the central 



icscrves. The association, too, uiider tlie power given 
lliein in tlie act, makes the hy-laws, rules and re<riihitioi s 
respecting tlie custody and management of the reserve;;, 
\'. Iiich are under the charge of the trustees in Montreal, 
Canada's financial center. 

oil. Siriirit// of note issiu's. — With the exception of 
such notes as may l)e issued ui)on gold and legal tenders 
deposited in the central reserves, the law does not retjuire 
the pledge of any security for the protection of the 
note-holder. It does not re([uire a cash reserve against 
( ither notes or deposits. Xo hank is ohhged to accept 
the notes of another l)ank. The government does not 
guarantee the re(kmi)ti()n of the notes, nor does it bind 
itself to receive them in payment of dues t(^ itself. All 
these are features that make it a])])ear sti-ange, at first 
sight, that Canadians should unhesitatingly accept these 
notes at j)ar, and nevei* (juestion their soundness as cur- 
rency. And this confidence has been well justified, for 
no one since lh!>() had lost a dollar through the failure 
of a bank to i-edeem its notes. This has been due to the 
following legal reciuirements: 

1. Every bank must redeem its notes at its head office, 
and in such commercial centers as are designated by the 
treasury board. These redemption cities are: Toronto, 
Montreal. Halifax, St. .Johti. Winnipeg, Victoria. Char- 
lot tetown, liegina and Calgai'y. 

•_'. Each hank must keep on deposit with the minister 
of finance a sum of lawful money (gold oi* Dominion 
notes) e(|ual to .'> \ni' cent of its axerage annual circula- 
tion; the total so dei)osite(l is called the "^-irculation re- 
demption fund." It is an insurance fund for use, if need 
be, in the redemption of notes of failed banks. The cir- 
culation fund bears interest at tiie rate of a per cent per 





.M<)\l;^ AM) n.\\Ki.\(; 

''i. IJ;inl< iioUs possess :i first lien upon tlic assets of ,i 

4. Hank stockholders aie lial)i( . in the even! of u 
l)arik'.s iaihn-e. to an assessment e(| to tlie par vahie of 
then- stoek. 'I'liis. ol' eonrse. proteeN the general cred- 
itor as well as the note-holder. 

'). Kach hank ninst oive a detailed monthly statement 
of its^airairs. accordin-' to a schedule provided in the 
Jict, These statements must he signed hy responsihle 
officers of the institution. 

5. Provision is made in the rexision iA' IDl.'J for 
s.iareholdcrs' audit of the hank's affairs: and also for a 
sj)ccial rei)()rt from the auditors, wiien ivqnired hy the 
mim'ster of finance. 

7. The Canadian Hankers' Association, an in^'orpo- 
rated hody of uhifj, rach hank is a mem!)er, is ^-iwn 
supervision hy the act of the issue and cancellation of 
notes, and of the affairs of a failed hank. 

8. The notes of a failed hank draw irtvnst at .5 per 
cent from the date fixed for their redemption hv the 
minister of finance, who may redeem then) out if the 
assets of the i)ank or out of the ^circulation redemntion 
fund." ^ 

These reciuircmciits make the Canadian hank note ab- 
solutely safe, althou-li the first feature is the most im- 
portant one. In that respect tlic Caria.ilan system for 
retirino- notes resemhlcs the famous .Suffolk plan of note 
rcdemi»ti()n. the most successful experiment in early 
American hanking- history. 

.512. h't serves ftard /;// etch hank.—Tho snhjeet of 
cash reserves docs not receixc much attention in the act. 
It is almost iiicredii)le to the Ameiican hanker that, aj)- 
paj-ciJiiV, so ill lie rn.Mi-iii Is ^^'\\\-u to this vital feature 
in sound hankino-. The law merely provides that the 



hank sliall hold not less than K) per nut of its cash i-c- 
scrvcs, which it has in Canaihi, in Dominion notes. The 
ininistcr of finance must make all necessary arrange- 
ments to deli\er Domin on notes to the hanks, in ex- 
change for gold coin, at the se\eral hfanch otiices of the 
department of tinanee at which Dominion notes are 

It is, of course, necessary that a hank sliould he ahle 
at all times ;o meet its demand ohligations. and to that 
end should have always ^ome |)ortion of its assets ready 
ill tlie form of legal-ttnder money. lint what that 
amount of cash reser\-es shoidd he will depend ui)on niany 
I irenmstanees — tiie husiness hahits of its customers, the 
extent and character of its demand and shoi't-time lia- 
t»ilities, and especially upon the degree of caution and 
conservatism employed in its management. In well-es- 
taldished hanks, managed ly conservati\e and experi- 
enced hankers, the ])i'ol)lem always settles itself without 
dilHeuIty. That is why, among other reasons. Canadian 
hankers ohjeet to fixed reserves heing made .*i re(iuire- 
ment. The hankers nemselves ire hetter al)le than any 
government to decide what pioportion of tlie dejxjsit or 
note liuhility the '>ank recjuires iti the foi'm of cash, to 
meet any calls which may be made. \\'hen that is de- 
termined, Canadian t)ajikers endeaxor at all times to 
hold an amount which is safely ahove the re(|iiii'ed limit. 

Without entering into any expended theoretical dis- 
cussion of the matter, it may further he said that Cana- 
dian hankers maintain that a I'cserve, if it is to he of any 
service, must l)c read}- for instant use. Xow a fixed 
legal resei-\e may deieat its own ends if the law is 
strictly enfoived. This is sufficiently well recognized 
in the United .'- ates where the hanks have, in periods 
of stress, on more than one occasion depleted their legal 


.M()\i;^' AM) H.\\K(\(, 


reserves. One of the most iiotaMe iiistaiiees oecnired 
in the first weeU of August, 1K!»;{, when the aogicuate 
reserves oC the \''\\ York C'itv ha?)ks uere $1 i,()()(>.000 
helow tlie 2.") ]hv eeiit Hmit. Caiuidian bankers aHirni, 
tliereforc, that in hist analy is th'- fixed leoal reserve is 
usifnl only as a sort of \iarnin ;■ hell — a notiee to the 
i)anh that if its reserves fall Ih-1o\v a eertain limit, its 
cash and liabilities are not in the i>roj)ortioi\ that eon- 
ser\ati\e bankers would ai)i)rove. They maintain, 
moreover, that a jaw re(|iiirii.o- Icual reserves may he 
(|uite applieable to a system v.l' thousands of e()mj)ar;'- 
tively small indejiendent banks, but that sueli is not 
needed in the Canadian system, wiiieji is made up of a 
limited number of very powerful banks under the con- 
ti'ol of eonserv.ttive and experieneed managers. 

A Canadian bank manager keeps before liim the 
amount of time dei)osits and demand deposits, and the 
notes outstanding. The time deposits form mueh the 
largest of these items. They bear interest at :i per eent. 
and while not legally jjayable on demand they are always 
l)i'omj)tly paid on reciuest. no banker wishing to have it 
rumored that all obligations are not pr()m])tlv met. A 
l)aiik's credit would suffer if it took advantaiie of its 
legal privilege to delay payment for even ten days. 
With these faets before him. experience and intimate 
knowledge of the bank's afi'airs ))ermit the manaiicr to 
ad just the reserves very near to the ideal limit. 

.jI.'J. Ji'cscncs composed of four dements. — In prac- 
tice the bankei- considers his reser\cs as conn)iisin<'' four 
different kinds of assets: (1) Cash on hand, (2) cash 
balances in other banks. {'.\\ call loans, and (4) securi- 
ties. Strictly sjjcaking "cash reserves"' mean only the 
Mrst, t)ut a banker usually has In mind tlic first and sec- 
ond when s|)eaking of his cash reserve. There is a gen- 

( A.\.\i)iA\ ii.\\i(iN(; s^■s^^,.M 


I lal'iN" imdiTstood ;i;41"((1ikii! ;iiii<)||m ||i, |),iii]<s tli.U in 
■irdiiKiry tillK■^ the cash rcs(,r\ts ol' a hank du^IiI to 
.(|iial !.■> j)c'r cent of its lial)iliti(.'.s. Ol' tli\ H jici- wwt 
^lM)lll(^ !)(.' casli Mil hand, the rfiiaiiiiinu T |'<i' cnil hcm^' 
lalaticcs diiv IVdid othfi' l)aid-v-<. 

l''r.')Tii thr American point of x'hw Canadian hanks 
'Id a \cry ..all amount of cash in pi-oporlion to their 
(li-nosiK and note issues. Acco!-(iinLi' to the I'elurn of 
May .'il. li)\ti. tile cash on hanii amounted to ■'^l.'J.'J.-i^}.),- 
.'{TJ. and je net liahihties. notes and al! dejiosits in- 
ehided, amounted to ^'. 1. 1!*."), HIS. .■}!•?. ihe ratio heiu'i only 
a little moi'c tluui *.» per cent. Hi:l for manv years the 
(■a^h-on-I;and I'cstr'.e has .•u'cra^cd hetwecu 10 and 12 
pi r ce?it of the net liahihties. 

.J14. Call loans.- At the end of Ma v. lOl.'J, tlie (\i- 
nadian harks had S(;i>/.)S'J..") K) of (••lil loans outstandiiu^' 
In Canada, and «'M;.1.-,1.-J0*> elsewheic. Most of the lat- 
(i !■ wci'c out in New ^'ork ("itv. the fa\i)r:te call-loan 
market lor Canadian hanks. '!'h<' hankers do not re- 
L'.ar.j call h.uns in the country as iti .uiy I'cspeet e(]uiva- 
leiit t») cash. Tiie eollateraJ securities i-annot he (piickly 
niarkotul without a sacritic<'. the stock market not heinu; 
on a sutHciently lii-oad hasis in Canada. Moi'eoNci-. the 
payment of domestic call loans would result sii;ii)ly '" •■• 
i'educti(!U of hank dei)osits. as has often Wvn illustiated 
hy a ])arallel situai:i(;i! in \ew 'S'oi'k C ity. 

It is (juiie otherwise with a call loan payal)lc in Xew 
N'ork City, and scured hy hitih-elass collateral. In 
noimal times such loans can he convei'ted into mon>. y 
within tweidv-fo'.;r hours. 'IMiis adds to the h;!nk's cash 
reserve in Canada cither hy the sale of Xew 'S'ork ex- 
change or hy an im|)ortation of ^old. If the market is 
|)anicky ni .New \ Ork, and ^'old camioi he secau'cd. as in 
11)07. the Canadian hanks may use tlicir Xew \ovk 



MOMIN AM) |{.\\KI\(; 



hjilanccs to l)iiy ^hi'ljim I. ills of (•\cli;m^(.. TIk y vaw 
tlicn iiuporl rrcin LoikIom w Imtcxcr u(,!,| |||..y m,,!. 

."jI,"). 1 iivisliinni scciiril/c.s. Haiikrrs (■aiiiiot, and as a 
nilr do not, ])\iivv iiiiicli i-cliaiicr upon stcuriHis as nai! 
of tlifir iTsfi'\ CVS. Tlicsr foi'in a srcond li dcfciKv 

to wliich tlif liafd<s do not cxixcl vwv to : ivcii. It 

Mould taUe sonic lime, of conrsc. to rcaii/v ^lon the ;■ 
sernntics. 'n tlicii- cjioicc of iiu cstnicnt the hanks ai'c 
not liariipcml hy law. Tiny may purc'Jiasr iVdcral and 
|)i-o\incial honds. and a.'so tli" bonds of Canadian and 
foreign cities, and tlir stocks and honds of domestic 
a?id foi-cioi! railways and indnstrial corporations. On 
.May ;n. I'JIM. the h.-.nks held scuirities as loMous: I)o- 
tninion and pi-o\ incinl -4()\ei'nm(nt secm-ities. S'.>. ()()!>.- 
H<!1 ; Canadian mniicipal secnrit ies and Mntishand foi- 
ei->n puhlie se.";rities. s-_>;{.s-J7.t;i;{ ; railway and otiur 
honds. dehentiircs and stocks. Sf;7.(»-Ji .;, tl. As a luh . 
the securities held hy the hanks do ii,,t llu-'tuatc ui-(atl\ 
iii anionnt; tlic\- ]>vvi\y, as a rule, to rednce their cajl 
loans in \eu 'S'ork to Ixiild up their casji riser\cs. 

")1<;. J,<>(iii.s In iiKiniil'achircrs. :Ji<il(.sa!(r>: ,1111/ fann- 
ers. Ill addition to the power ^ranttd to Ca?iadian 
hanks to cn^au,. {,, ordinary hankinu l>iisiiicss. they arc 
permitted to assume \(r\ important functions in aidinu 
the manufacturino- and wliolcsak trad<- of the eouiitrv. 
The haidar is empowered to lend mom y en the'ilx 
of wan house re'ci|)ts and hills of ladiuL',. Loan- are 
^;|-atil((j to wholesale dealt rs and d'lppt in of produce of 
all kinds. The hanks ha\c a lien, not only upon tln' 
^oods oriwinally acee|)ted as sccui-ity. hut also upon the 
^■oods which ill the c.airsc of hiisi;,ess aiv >.iihsiitut( d 
therefor. The same jiolicy is *' llowcj in |,,;i|p, ,,,..,,1,, |,, 
inaniifacturt rs. Thus. ili. hanks hecomc \ irfiialU silent 
partiurs in hii>iness. As far as pi.ssihle. the hank act 




i II I 

iii.ikcs iiicirliandisf of all kinds a sort of collateral siru- 
niy for l)aiik arlxaiicvs. A lar<ic part of the so-ealled 
(iiiiiiiRrc-ial paper in Canada is secured praetieally 1»\- 
e to o-oods ill Wiiirlioiises. faetoi'ie? and wholesale 
les. In this way, to a niiieh ^nater extent than is 
uciK rally reeo,niii/ed. the banks are heliind tlie trade and 
industry of the country. 

Ill the last i-e\ision of the act (IDI.'J) additional bnsi- 
ii( ss of this nature was made possible for the baid<s. It 
was at first proposed that a bank nii^ht lend nionev to 
;t lai-nier upon the security of threshed ^niiii of everv 
kiiid and to a rr.neher iijion his cattle. This was inodi- 
li< d to permit loans on orain in the farmer's possession. 
'I'hese niodilicafioiis of tlu' act were advocaied by mem- 
h( IS of parliament from rural eonstii.u ncit's. especiallv 
from constituencies in the West. (Generally sj)eakin^. 
tlu country <lisfricts .lave found most fault with the act. 
It was said that the cities were bcino- I)i;i|t ii|, ;,( {j,,. (.^. 
p' iKc of the i-iiral districts: and that the merchant, the 
w hol( >al(r. and the manufacturer w t re recei\ing bene- 
lils in which the farmer could nr*t participate. 

That the I'.irnicrs could not secure ad\ances u|M)n 
urain and cattle still in their |)os<;ession was (juite true: 
I'll! (hat they were not furnished with sullicicnt bankin<>- 
ncomiiiodaiion ofhei-wivc dots not seem to have been 
I lair eliaiL;c against I he banks, '{'he banks ha\c natii- 
I lily rrfiis((l to advance tlu in mon<y to be iincsted in 
'i\<d capital form land and buildinos but tluv lia\ e 
ilway- pro\ ided nioiiev for working capital— tnachinery. 
lools. scrd. etc. on nasonablc security. In the 
tli<' lariiieis are. as a class. d( positoi's, \\{^\ borrowei' 


Al the investioation be- 
Me th< ( ommiltee on Hanking and Comnierce. in 

W'esl the re\ el- 

se IS lru> 

* ii 





.M()M:V AM) I{.\M\IN(; 



.April. 1!»1.'}. Sir l^diiiiind \Valkcr, l^-(\si<lcnt of the 
Canadian Hank of (."oiimieive. stated that at TJ-J 
hi-aiu'lics of this hank in the middle or |)rairie prov- 
inces, farniers" deposits amounted to .S2.H(>!>.'.>2»>. and 
loans to si.'J.().'{.).7Sk Moreover, wjiilc in former davs 
in the oldt r provinces the hald^s waited until a eom- 
mimity had a population of two or three thousand hefoiv 
oi)eninu a hraneh. at the |)resent time hanks o(, j,, with 
each railway division in the \\'( st. and are ready to do 
husiness with the lii'st stoi'ekeeper. In tlx' Peace ]{\\vr 
disti-ict h;!nl>s are to-d.iy many miles in advance of the 
railways. It i'^. on tin avcra^i'. two or three vcars he- 
fore these hanks can l>e exiK'cted to pay. 

The new terms of the act. under which the I)anks ma\ 
make advances to farmers on tlu'ir ,yi'aiii. w ill hr of urcat 
henefit to the West, '['he farmer has heen (om|)ellcd 
hitherto to close his (jnancial year :d)out the tirst of \o- 
vemhei-. This is heeause the Wist is a hiu' })Oi'i-o\\ iu" 
count IV ;uid is. to ;t |;,ro(. rxlciit. dependent upon the 
an-ricultural impleriK nt makers for credit. These coin- 
l)anies. in s( llin<.- (,, H,,. farmer, have made notes of the 
latter f.ill due Xovcmhcr 1st, c'lch year. The result is 
that the farmers have Ixvri compdied to throw tlicii- 
produce on the m.irket in the months of .Sepiemher and 
Octoher. as soon a- the ur;,i,, js threshed, to secure the 
necessarv nmney to mci t payments. Oiu- i-csult 
of thi' unfoitnnate state of alfairs has h. rn that Can- 
•'"'•' 'i''"^ 'I'K' '" lace ;i Mr.ain hlockade each vear. The 
f'ln.K IN li.ix, had to throw IIk ir ^rain on. the market at 
•■' '"'"■ ^^'i<" i' would hrin.u' fli'' smallest pric<'s. Th<' 
new Icuisi.atiori v\ii| make it possihje to h,.rrow. on 
thr(sii(d uram in their possession for two. three and 
f"iir months, 'n,, m;,iri uill ||,ns lie shipped out or;id- 



iijilly ,'1(1(1 al).sorl)c 1, as rc(niirc(l ii (lie world's markets. 
At the ;,ame time the farmers will he in a hetter position 
tn ])ay their maehiiie and store hills as these heeome 
line. They will he [)Iace(l on terms inore nearly ap- 
I'lnaehinn- .(inalify with the wholesakT and the manu- 
facturer than they lia\e heen in the past. 

.")17. Inlcnial hmik inspcvtiou. — At the last revision 
of the act the ^rt^neral puhlie were more eoneer?ied in the 
indhlem of an a(ie(|uate system of inspeetion tluui in 
anythm^r v\sl\ 'V\w immediate rea.son therefor was the 
disastrous failure of the Farmers" liank Mhieh oamhled 
it-; resources o?i the Keeley i.tine. I-'or several years 
pieviously. however, there was a strong- demand for 
sniiK" system of external inspection of tiie hanks, the 
prineipal advocate of this iiuiovation hein«r Mr. II. ('. 
McLeod. late general manager of (he Hank of \(/^a 
Scotia. In response to the <4'eneral demand several 
hanks of their )\\ii accord estahlished a shareholders' 
■ludit in addition to the ordinary internal examination of 
'he hank. 

In the act as revised the hanks still retain their fornu r 
system of insjx'ction, which is now sii|)pUiiiented l)v a 
shareholdeis" audit. The hanl.s will continue to place 
rliief reliance upon their own ins|)e;'tors, the mineral 
niana/r(-r, and the hoard of directors. Thev expect verv 
little in the wa\ of results from the shareholder^' audit, 
riic ki'ynoti' o ■ the ornani/.ation of Canadian hanks has 
iluays hern the centralizatinu (»f rcspo.isihilitv. The 
general manager is jiractically supreme. He lia-> an 
irmy of employees, jdl of whom hut two or three ha\c 
l"<n placed in their positions hy him. Althou-^h the 
'"•ard of (jn'eci(.rs are leualls aho\c him in autiw.ritv. 
" I>r<sent:n^r ;is tlity d.. tli< shareholders, yet his power 

- >i 





■• H 







is practically unlimited. Tlic <4ciieral manager of a Ca- 
nadian hauU knows so niiicli more about actual business 
conditions tliat Aviicrc there is a contlict of o})inion l)c- 
twciii liiin and the directors the latter usually bow to 
his judf^ment. lie is. as a I'ule. assisted by two or three 
officers a))])ointe(l i)y the directors. mIiosc business it is 
to aid the general manager and su|)j)lement whatever 
information may In re(|uired of him. The chief ac- 
countant is expected to know (piite as niui h about the 
banks affairs as the general mana<ifer himself, and is 
ol'ien prt'sent at the board meeting's. 

'I'he chief appointments made I)y the freneral maiiager 
are Ihoseof the mana^^trs of the branch banks. A lar^e 
branch is i?i daily couunimication with tin h id office. 
either by uii-e oi' liy letter. They are ol ;i<^ d to conduct 
their business in coid'ormity with ■ rtain reyidations; 
but aside from that the branches ai'( manatred as ijide- 
pendent batdss. They mu-t fuinisb \\eekl\ accounts to 
the head oflice if all loans and disc iints. and at the end 
of caeli month a detaili'd statement of '-esources and lia- 
bilities, with a description of all cn!lat( lal security iield. 
The branches are ins|)i'cfed at irrej^^ular intervals l)y offi- 
cials ap|)(iinted by the ^enei'al manaj^er. These men are 
tliorou^hh c()m|)etent. have had years of baid'vin^ expe- 
rience, and are in i-eceipt of larj^c salaries. They are 
cxpii'ts '\ hn pi ri'orni their work with a deep sen ' of 
the i-espniisiiiilitie^- iuxoived. AN'hcn their reports aic 
s(nt in tlii\ are dealt vvitli b\ the administration of the 


iV I'onen te example of the cost and nature of the 
wnrk in\(il\(d is found in the msjxctioii of the .'{?<• 
branehrs of the Canadian Haid< of Commerce in \\)\'2. 
That bank em|)loyed i't)y this work I !■ officers of the 




lii^licst ;»ra(le whose salaries amounted to $4().()()() and 
,1 lar^c iHimhcr of ordinary audit olliccrs and assistants 

.lose salaries amounted to sm.hoo. In addition there 
were many elerixs. steno^raj)hers and messen<i;ers em- 
ployed at a total eost of $8.{)()(); travellini,' expenses 
\uie .$2.'}.()0() ; and eliar<4es for rent, lif^lit. ])osta«r(.', sta- 
tionery, ete., eame to ^i:j. ()()(). makin,(r a total eost of 
^M)'2J(\'2 in one year for one insjx'etion of this hank. 
Tlie head ofHce as well as every hraneh hank is in- 

As far as the puhlie is coneerned it has no means of 
i'ld^'in^r the standing' of a hank except hy the monthly 
returns puhlished hy the hanks according- to the require- 
ments of the law. These returns are fairly eomj)rehen- 
sivc. and have heen made more so !)v the revision of 
ini.'J. They will l)e deserihed in Chapter XXXII, 
The minister of Hnanee may call for sui)|)lementary in- 
formation from any hank. \\!ienever, in his jucl^nient, 
"^iieh is neeessary to afford a complete knowledne of its 
■ ilfairs. Of course, these returns can !>e taken only for 
"hat they are worth. In the case of several of the 
failed hanks they have heen made with evei-y decree of 
falsification, heeause no independent eheekin^r of figures 
^vas possihle. 

.■)1H. Hank failures in (\ina(Ja. Thwc have heen a 

I mher of disastrous haids failures in C anada since Con- 

lederation. the most imjinrtant heino- tho>e of the ]']\- 

■lian^rc, Ontario. Soxerei^^n and 1 armers" IJanks. In 

•lie ease of the Ontario and the l"a' n< rs' IJanks there 

\< re no losses to citln r note holders or depositors. The 

Ontario was tnk.ti over hy the Hank of Montreal and 

liquidated hy that insiiliit mn. The Soxcreinn was ah- 

-'•rhed hy ;t .<4r< -ip ol hanks which (ii\id((| its otlices 
(•-VII— js 





aiiinii^ tlicm. accoulin^ to districts. This was done 
partly in st'lt'-dfrciicc. to jireveiit a <j^eiK'ral ])aiiic. Tlic 
mere siii)ersc'rii)tioii ol' tlie words "Bank of Montreal" 
on the bankin^v; house of the definiet Otitario Bank 
stopped a run on that institution almost immediately. 
The Farmers" liaid<, however, was left to its fate. 
l'"rom the start several ])rominent finaneiers liad oh- 
jeeted to the "rantiny,- of a eharter to this hank: and 
the sudden eollaj)seof its reekless career in hi<2;h finance 
aj)p.irently occasioned little or no surprise to the l)ank- 
ers of the country. 

Mr.ny unfair com])arisons have been drawn ])etwepn 
hank failures in Canada and in other countries, partic- 
ularly the Cnited States. Since Confederation eleven 
hanks have failed in Canada: hut it must l)e borne in 
mind that not all of these could iiave been chartered 
under the present act. Even so, the true perspective is 
not secured by reference to mere numbers. This is 
secured only by comparing' the total assets of the failed 
batd<s since C'otd'ederation with the total assets of the 
banks as they exist at the prcKiit time. This is obvi- 
ously the oidy correct method to follr)w. since Canada 
possessivs few banks-only twenty-toin- in r.)i;i and 
tlurefoic a reference to mei-e numbers ixives a uro- 
tes(|ue view of the situation. 

Sir Edmund Walker, in a statement snbinittcd to the 
Banking' and Commerce Committee, has admirablv snm- 
mari/ed the situation as follows: 

I. Total ass(l^ of Canadian banks which 

have t'aikd simn Conftdc I'alidii . $77.780, Hi* 

*J. 'I'otal assets of Canadian banks as on 

December .'{l, 1!)12 1,.VJ().()H1.1.-,S 

.'}. Total liabilitie-s to the publie of Cana- 
dian banks a^ on December .'{l. IHl'J. 1 .•_>!»•_*,}. *>! .1. ST 


4. Total losses l)v cirditors ( c\clii(linir 
shareholders) from hank failures 

since Confederation G. 000.3.57 

.'). Total losses hy creditors throu<)h fail- 
ures of hanks which coidd have !)een 
organized under the present Hank 

Act iMTO.'XIf) 

And these consist of -t hanks; 
losses hy: 

Exchann-e liank •$.574. .)87 

Central liank 7.08.'J 

St. Jean Bank 200.088 

Farmers" Hank 1.208.:U)8 

3. Percenta<^e of total assets of faik'd 
hanks since Cotifederation to the 
t(»tal assets of all hanks on Decemher 

•^1- li»l-' 5.09 

7. Percentage of totnl losses hy creditors 

to total assets of all failed hanks. . . 7. 830 

H. Pei-ceiita^'e of total losses hy creditors 

of failed hanks to total assets of all 

!)anks oi l)eceml)er 31. 1012 .3001 

0. Percentage of total josses !)y creditors 

throu<ih failures of hanks \\hieh 

could ha\(' hcc!) or<iani/c(l under tJie 

l)resent Hank Act to total assets as 

on Decemher 31. 1012 A VJC> 

These comparisons, of course, do not take into ac- 
count the \ei-y laroc- losses hy shareholders. Hut from 
that point of \ lew it may he said that in Canada there 
iiave heen less failures in hanking' than sn any other field 
of cnter|)rise. Moreo\tr. it should hi- notid that it is 
scarcely worth wiiile to make comparisons he'.ueen fail- 
ures in hanking in Canada and in otiiei- countries. In 





yH)Sl.\ AM) HAMvlNCi 


tlic case of the I'liitcd Slates, lor exaiupk', \vc would 
h-dve to take into eonsideration the State IJanks and 
Trust Cornpauies as well as the National Hanks, where- 
as in Canada there is hut the one systeni of hankin^. 

However that may he. the ])eo])lc of Canada wrrr 
thorou<ih!y aroused over the rec-ent l)aid< failuirs, and 
particularly over the C()llaj)se of the I'arniers' Hank. 
It WHS due more to the failure of that institution than 
to any other cause that a demand was made for some 
sort of independent examination. K\eii thou,uh in tin 
ease of the L'armers" Hank the dej)ositors' losses were 
assumed hy the ^ovei'iiment. tiu re is r' > disiiuisin^' the 
fact that such losses eventually must he sustained l)\- the 
country. They merely ])lace the ^ox ei-niiieni in ilie 
place of the depositois. and that mainly foi- |)olitieal 
reasons, \e\ertheless. when all the tacts are consid- 
ered, it seems (|uite evident that the Treasury Hoai'd 
never should have ui-anted a certificate to the Faiiners" 
Bank permitting' it to heyin huslncss. 

.■)11). Slnirf/ifjhlrrs' (iiidif. — As a result of the demand 
for inde])end(.'nt examination of the l)atd<s. it was pro- 
vided in the rexision of the act in 191.*} that the share- 
holders should ap])oint auditors, at each ^enei'al meet- 
ing, from a ''st of not less than forty names selected by 
the whole i(.,(.y of ^'cneral mana<4'ers. suhject to the 
apj)ro\al of the minisUr of finance: with the furthei- 
resei'vation that one-third of the ^lockholdei-v. if dis- 
• ttisfied with the auditor appointed l)\- the ma joritv, 
nsay ap])eal to the jm'nistcr for anotlu'r. This mdliod 
\\as largely based on the i-ecoinmendations of .Mr. II. ('. 
^rcLeod. The auditors must thoroughly examine the 
books and accounts, cash, securities, docnmenis and 
\()uchers of the l)a?d<. In addition the\' are empowered 
to !'C(|uire from the <lirecfors arivi olliccrs of the bark 




Slid) inroriiiiitioii and explanation as inav Ix.- lU'cessarv 
\'ny tlu j)i-()iRr ])(, i-lorinancT of Hkmi- (IiiIkn. Tlirv are 
allowed access, too, to the returns of the i)i'anch hanks 
s( III to the chief oflice; and they may. at tlieii- discretion, 
\ isit any hi-anch or a^^-ency for the pnrjjose of e\aininini4- 
its l)ooks arid accoiuits. It is theii- (hity, also, to check 
the easji and verify Hie secnrities of the hank at its chief 
(illiee; and. if they deem it advisal)le. to do the same at 
,iiiy hraiieh or agency. The auditors must rej)ort to the 
sliai'eholders their tindinn- at the annual meeting, or on 
any othei" special occasion th()u<>ht necessai-y. In addi- 
tion, the minister of finance may direct any auditor 
;;])pointe(l accordino- to the ])r()visions of the act to make 
a special return to him. the service so performed to lie 
remiiiKraied hy the ^'oN'crnment. 

This external examination of the head office of a hank 
and its chief hi-anches is sim])ly an attempt to do for 
the l)ank what has been done foi- years foi- the lar^^e 
iiK-rcantile houses and manufactui-eivs. A thorough ex- 
amination of the <ie,K'i'al ledner at the head oflice will 
cover the special re|)orts and statements from the 
hranches. It \v(ni'd also test the accuraev of the tiuures 
.L;i\cn in the monthly statement to the go\ernment. and 
I he statements presented to the shareholders. The |)res- 
ident of a Canadian hank must si<in these statements; hut 
the president, as is well known, is not in a jjosition to 
slate tliat the tigui'cs are e\ en appi'oximately coi'rect. 
<)f coni'sc the signature of the .ueiieral manaj^'cr is at- 
tached to these slatements: he oiinht to know, and is 
paid for knowin;^', wluthtr tlu'se statement> ai'c correct. 
Hut the added sionatiii'c (.f expert accountants will make 
assui'anci' doiihly sui-e. Xe\ eitheless. too much must not 
he ex])ecte(l IVom this system of audit. .\firr all. it 
cannot do more than \erifv the fi'^ui'es ami statements of 




ii !>iiiik. It caiiiiol jiidoe „f tlie (itiality of fhc assets 
lield a fact of paranioiint iniixirtaiUT luillur c-aii it 
ptvvciit loans IHJM-- approved of by the directors. In 
t\ 1 1 y larnc- iiridrrtakinn. resjxMisihility rimst finally rest 
upon the directors and cliie!" e\ccnti\ c oHiccrs. 

.VJO. ('(inadid,, IhniJccrs' J.ssorialioii. - TI. • Canadian 
Iiaid<ers' Association is an incorporated Ixxly with \n)\v- 
vvs and dnties prescribed in an amendment to the bank 
act passed in 1 !)()(). Kach of the chartered banks is 
represented in the meml)ership and has one vote. The 
principal dnties of the association are to certain 
trustees for the central o(,ld reserves, to snpervise the 
issue of bank notes, to look after the deduction of worn 
and mutilated notes, and to take charge of snspended 
banks. The head(|narters of the association are in the 
IJank of Montreal Huildinu-. and its executive olHcer is 
the secretary-treasnrer. The expenses are apportione.l 
amonu- the bard<s, and do not constitute a very heavy 
l)in-den. All expenses inenrred on account of a sus- 
))cnded baid< are a charoe aoainst thai bank. The 
clcarini-' houses in the I /onunion are :.lso snbject to 
reonlation by the association. It has ureal power and 
prestioe thron-h the conntry, representing- as it does 
the opinion of the banks as a whole. 



')21. Branch Ixiiih.s aiul the local coinnuniitti.— The 
hiaiich l)ank systtMii lias hccii snhjec-tc-d to severe eriti- 
v\<\u. es])eeially in tiie West, where it lias l)eeM eharoed 
that the hanks have not suHieiently met loeal needs. Re- 
cently, in an attempt, apparently, to meet tliis situation, 
two l)anks have heen started -the Rank of Vaneouver 
and the Weyhnrn ,'^eenrity Hank. No doul)t the heavy 
iinmiiiration of Ameriean settlers has had something- lo 
do with the a-^itation for the loeal haidv as distinet from 
the hraneh l)ard<. Nevertheless, speakinj.^- for Canada 
otdy, the hraneh hank system has more than justified its 

In the East, certain agitators have attacked the branch 
l)anks on the <>ronnd that in the country towns and rural 
districts, they do not make loans to ar.y great extent. 
Much of this discussion is apparently based u])on the 
assumption that the banks have to do only with direct 
customers, or at least with those who apply for loans. 
This is obviously not the case. Every economii- institu- 
tion lias its direct relationshii) to the well-bein<r of every 
class in the community. This is conspicuouslv true of 
the l)anking system, which su])plies to so large an extent 
the machinery of exchange and production. A good 
banking system is of as great importance to the con- 
sumer and the reei])ient of wages as it is to the men en- 
gaged in the distributive business or in mai\ufacturing. 
W'lien the baiiking system surt'ers. the injury passes on 





1.0 !?™^ IB 






|| Z2 

j 2.0 


^ ^pp, ipn irvviGE inc 

-fcOJ 'jS.* 


MOXIA AM) 1{\\K[\(; 


^\itll (•uiiinlat!\c I'orcL' tlnoiiwh \ai-i()us ('0(jii()iiiic' <^rou]:N 
until its limit is rcacli'-d in the ua^c-caniing and con- 
suiiiiii^' I'lassrs in tin fDinniunitw 

'I'lie small local hank cannot he estahlislied in Can- 
a(ia ()\\in.u' to the I'act that a hank must have a snh- 
scrihed capital o!' at ha>t S,5()().()()(). oT which S2.)(), ()()() 
must i)e i)aid up hcfocf it can hcwin hnsiness. Should 
the Hard< Act rwv ^^]\v authority Tor the or-^-anization 
'»!' small hanks, tlu proliahl ■ i-csult woidd he the ruin ol' 
the uiitoi-lnnate stockholder and hea\y losses to the de- 
positors. J-'.ven a liank of could not |)r()titahly 
comi)ete with the lar^e hanks unless it were estahlislied 
in a place of '-onsiderahle size. Without hranches it 
could not <^() into a small place at all: it woukl lia\e to 
confine' itself to a town \\liei-e there v.onKl I)e a com- 
parati\ely \:\r<xv amount of imsiness. Hut in all such 
towns there are three or foin- hranches of laroe haidxs 
competing for the hii^iness. Deposits would undouht- 
edly \k' secured in the smaller placis, hut it ue^nld he hard 
to |)lace loajis. espiciaJIv in the smaller towns and rural 
districts of the Ivist. and of Ontario in jiarticular. The 
defunct I'armers" Hank, for c\ample. securi'd S] i;j.()00 
deposits in a iittk hamlet called Dashwood, 10 im'Ics 
l''"i" IIk' h)wn (if Clinton; hnt it could not negotiate 
many safe loans. TIk I'c are scores of such small places 
i" Ontario in the same position. A local Itnuk with a 
capital of S|o(!.()()() or (v.ri s-J.l.OOO (..uld not slay in 
hnsiness in such places, for Ihi' e'apital could not he used 
unless it wt re s. nt out of Ihc coinitinnitv. 'I'he people 
ill these places are wcll-|o-d... and aic d< posilors, not 
horrowers. Hnl. iir\ ,|| hek-s. i| is (uilv thi'oii-^h the 

'*t»^ltltlll IMMM MI>mMt* 

I,,.,..,.!, !:•!!;!. ^ • h:! I. \., '.'..:: \. 

loans a" fair rates. Otheruisc. thev are ohli^cd to turn 




to ])rivatc hankers and money lenders ulio eliarge liigli, 
almost exorbitant, rates. 

Mr. J. B. Forgan, president of the First National 
Hank of C'hieago. gave some very illuminating evi- 
('(iice on this jjoint before the Committee on Hanking 
and C'ommeree at Ottawa, in ^\i)rii. l'.)l.'{. He ex- 
plained that, as a rule, the loeal Iniwk was organi/ed. in 
tiie I 'nited States, by loeal bori'owers, who wanteil to 
utilize its funds: and that it was ecjntrolled by those 
borrowers. Loeal bankers, a? a I'ule. wish to elitig to 
tlieir authority over loeal financial matters. Sir Va\- 
iiimuf Walker, testifying before the sub-committee of the 
Hanking and ("urrcney Committee at Washington as 
to the alleged supei'iority of the local o\ ci- the branch 
bank, said: "It is one of thosi- popular \ iews that is 
repeated o\er and o\er again, but ! am (juite positixc 
that under the branch system we ser\-e the customer bct- 
lir than the local baid< can do." 'I'he local bank is too 
a|)f to get into a iMit : to serve the interests of a i)articu- 
lar set or clifiuc. The big chartered banks of Canada 
can afl'oi'd to take an impci'sonal point of view. Mr. 
Meeker, of l*rinceton Fniversitv. follow inu' Sir Kd- 
iiiiind Walker befoi'c the same committee, said: "The 
local baid\cr is not so well able to furnish the necessary 
ci-cdits in his loeal community as is the managci' of the 
liranch of a larger bank. The loctd banker, moicoxcr. 
■- likely to fa\()r ceitain infci'csts." 

.")•_'*_*. ('(nicitilrntion of rcscn'ts in liranih Ixiiihs. One 
o\' the chief i-caso?)s w by the branch banks lia\ r bccu able 
to a\i)id a uidc-spread linaneial panic lia.> Imii because 
"I tbcii- control n\' rcscr\ I's. Canadians ri'gard as waste- 
I 111, dang (roils and unscientific tin maimer in w bicb each 
"I more than I'T.OOO banks in the I 'iiif< d Slates iindei- 
iiiok lo control its own legal reserves. I'Ik \ !ecoi,;ni/(.- 



i 11 




fliat whenever aiiythinn- oeeurs to shake pnbhc Ponfi 
(leiiee the hanks nnist he the first to take ahinn wheii 
these are h)eal. and independent of one another. At 
sneh a time, in tlie ( 'nitid -States, eaeh hank jjroeeeded 
to sti-ennthen its own casli reserves, hy enrtaihn^' ere(h'ls 
an(i eonvei'tino its h)ans into cash. The result was that 
the ;^()hl snp])ly of the eountry was (hstrihnted anionu 
27,000 !)anks. instead of i)ein<i' niohih/.ed and controlled 
at strate<iie points. IIai-dly a hank in the lot could 
meet all demands upon it: so cash payments were sus- 
pended or seriously restricted. In Canada the hanks 
havf not suspended ea>-' payments since the C'ord'edera- 
tion. This has heen due in larye measure to the fact 
that the cash re(|uirements of each district are cared for 
hy the head oHice. 

.)•_>;{. XiiHihcr (if hfiiih.s l(, iKipiildtioN. It has somi- 
timcs hctn said that the Canadian chartered hanks do 
not providf sulHcienl hranclies to meet the needs of tlu 
people. This is not horne out !>y the facts. Aecoi'dini; 
to a \ciy careful statement |)re|)ared hy Sir Kdmund 
Walker and sul)mittt(l to the ("oiiimittee on Hankinu 
and Commerce in .\piil. I'.d.'J. there is one haid; to each 
2. HtT of the population, in the ('nited Kingdom there 
is (»ne liank to each .kIK". persons. In iMi^land. alone, 
there is one hank to each ,").l.-J!t of tlie population. In 
Scotland, where the luaneh-hank sysli ni exists in the 
most com|)|(te form. thei-e is .mt hank to each L'.ior, 
P<"1*'<'- ' " !''<■ ' iiited Stales there is one hank to eacii 
•'ktM) of the population. Scotland is the onlv countr\ 
w hieh exceeds Canada, .ind it d<ies xi heeaiise ot' il . mor( 
hi^^hly de\( lo|)((l i»raiieh-lianlsin<4', 

.\nolh(r useful comparison, althouuh too much must 
not he nd'erred from it. may he made h\ comparing' cer- 
tain cities. Hiisloi. in l''nuland. has a p<)|)uIalion much 



tlic same size as Toi'.Jiito, .'{oT. <>()(>. It lias one haiilv to 
.").(!7+ persons. Toronto lias one hank to •J..'}.j4' of its 
|)o|)iilation. C'ineinnati, in the Tnited States, lias one 
fMiik to 9,125. On the other ha'.d. Detroit has one 
lank to 1.100. Takinj^' Canada as a whole, there is in 
the cities one hank to e\ ery .'}.000 of its population: in 
tile I'nited States there is one hank to every 9,000 per- 

A point that should not he overlooked is that some 
.inters of ])opulation are \ei'y liea\y jjorrowcrs of capi- 
tal, while oidy small deposits ai'e reeei\ id. These jjlaces 
consist of the husy mannfaeturin;^' centers as distinct 
tVom the haekward or rin-al distiict. Such place-: con- 
sist of Herlin. in Ontario, with a hundred manufacturinu' 
I ^tahlishments. (,f which ei^ht are \cry lar^e: Hrant- 
iiii-d. with si'xcnty: Peterhoro. with thirty-ti\ c: (Juelpli. 
\Mtli sexcnty: Sarnia, London, and so on. It is \(rv 
(ionl'fful whether local capital could ha\e taken care of 
these places; certainly local deposits could not ha\e done 
•><). 'i'h.eir prosperity and "growth are due in lar^i' meas- 
ure to the ahility of the ^rcat chai'tered haid<s to furnish 
the re(iuisite capital hy oatliei-in<4' the funds of savinn' dis- 
ti-icts and pourin<4 " sti-eam of capital into the cities and 
ttiuns where men of foresiohi and irilerprise are ahle to 
f'liild up (loui'i>>hin^' industriis. 

.")•_' !■. l)(/i()sll iiirrincii in ('(iiniihi. There has hcen a 
la r«>'t' and steady growth of d( posits in C'an.-idian hanks 
\\iHiin the last decade. The de|)osits stood on May .'{I, 
r.ti:}. at the urand total of $1 .09-_'.H.50, Mil- a sj)len(lid 
Niiowin<.i' for a new country whose resources are onlv hc- 
uinnin^' to he de\i!o|ied. These deposits wcic niade u|) 
of $.'J(>4.1.)9.<ill'. paxahk- on demand in Canad;!: !^<'>.'<0_- 
7 ■»,"). CO,'}. IcchnicalU- pa\ahk' after a lixid dale hut <>( ri- 

illy paifl on diiuanil: and ><'.>7.9.'{.').2iri, j)ayal)le else- 



ii ' 



where than in (";uia(hi. On the same (hite there weiv 
.$l()lM)!>7.!>;i(; or notes in eimilation. 

In Cana(hi. anion^' Icoishitors. far less attention ha.^ 
l;<-en oivrn to (lf])osits than to note issnes. This has 
hicn (hie. pei-haps. to the east- of ie,nislatin,u' npon nole 
ivsnes as eonii)are(l uitli dcijosits. and heeanse of the 
e()nij)arative sparseness of popnlation. taking- tlie eoun- 
try as a wlioju. In \hc rnrai (hstriets and amon- {1,,. 
w()rkin<i' ehisscs. tlie hank note and the Dominion note 
are the ehiit'f tnech'nm of exehanuc. Hnt there has hccn 
a very ratud <4ro\\th ol' deposit enrreney amono- t!ie 
cominereial and hnsiness ehisses in the towns and eities. 
The o-rowtli of deposits has heen ont of ail projjortioii 
to the oro\\th of hankino' eajiitai and to thr (Uianlilv 
of notes issnt'.k This highly ellieient enrreney. repir- 
sented l)y depositors' elieeks ayainst (h posits, is present 
in hiro'e amonnts - inneh hn-yci- than any other nu- 
dinm of exehanue. Tiie (inahly which eharaeteri/.es 
it in a pi( -eminent dv^^nr is its elasl icily. It athipts 
itself* to the (hinand of (he momeiil witlioiit \ isihir 
effort, either hy ex|)ansion the ease mav 
lie. And it does this (jnite irrespective of ki>ishiti\e 
pin-pose or unidance. In view of the extraordinarv 
•growth of this kind of cre.jit eiirreiu y. the (jiiestion of 
the amount of hank notes in eirciikition <iiiks ahiiost to 
insionilJe.Miice. Of course, there remains the .yraver 
• piestion as to whether tlie .u'ox erimieiit slioiild interfere 
in th<' amount and kind of currency iiicded hv liie peo- 
!''<• -^t tlie revision of the act in IIMM a nivat (kal >>( 
eritielMn ua^ (hrected at tii<' i>^slle of ;. eircidat inu 
medium of (Achaiiuc liy tlie lianks. instead of li\- tli^ 
.government. It seems liowcvei-. Ihe nHdJin.! 
of exchange should he made up of the kinds of monev 
I KJst convenient for the use of the commiinitv, ami 



ilividcd hctwcfii tliese kinds in Ww proportions niost cou- 
wwk'vA. uIu'tlRT tlu'sc 1)0 (k'])o.sits oi- hunk notes. \o 
i(<>islalurc. and no conclave of hankers, i-an determine 
llic amount i<\' notes needed IVom yeai- to year in the 
' \(han,iies of tlie country. The oidy rational process 
- to pei'inil the liaidss to extend acconunodat ion either 
li\ a deposit account or in hank notes, as the customer 

While the deposit currency is almost an ideal medium 
i! ( xchanu'c in the urhan ceiders. \'et the cost to the 
Ii.iiik is larmier than is ordinarily su])posed. In fi^urin<j: 
!li" cost it is necessary to include, in addition to the cost 
"I the clerical \">()rk in\<)l\ed. the cost ol' supcr\ision of 
liii' mana^ii' and accountant, as well as an apportion- 
fiK i:t ot' the I'cnt, stationery, liyht. heat, \ault and safe 
i(( omniodation. and also ef the head ollice expenses. 
I'.ven if oul\" the salaries of the men actually en^a^'cd in 
iinndlin;^,' checks and dejjosits ari' considered — the teller 
tiid ledu'er keeper the cost per cheek amounts to no 
Micon-idirahle sum. It is also seldom reali/ed that a 
cluck form on safety paper costs the hank i)et\\een $- 
;iiid S'_'.,")() pel' thousand, or practieall> one-cpiai'ter of 
.1 cent each. 

( )f course, in i\ cry hraneh. no niatter hoAV small, there 
;u'e certain lixed charucs to maintain, irrespective of the 
'iii^iness done. A new hi-anch for several years aftt'r 
lis opening', has men and machinery to spare, and can 
li.indle small at'counts withoid any additional expense. 
I ! is only w hen the husine^s has increased, and mori men 
Mid acconimod;ii ion are i'e(juired. thai many small ac- 
■lunts ma\ lie liindt i(som<'. This explains \\\\\ some 
!\inks enconrau.c" small checkiuij: accoimls. 'i'lie opcninu 
if these accoimts enal»le> the manaifcr of lh<' haul to 
!ii I'oine ■ic(|uaititcd with his neiulihor'-, ;tnd frccpiciilly 





a small acroiint may turn out profitable or hriiifr desir- 
al)!f conti-ctioiis. It may he said, however, that'^in last 
analysis, no aeeount is protitahle or valnahle unless tin 
ineome exceeds the expense of keepin-' it. In revieuiiii. 
;iii aeeonnt the minimum weekly halanee is the on, 
that determines the loanino' value of the deposit to ;i 

.'yj.'i. Cnticisiii (if htiiih--i/()tc m/zcv. The note eiren- 
lation of Canadian hanks on May .'Jl, l!»i:{. was Sio-j.- 
JM)7.9;}»i. This circulation has been denounced hy certain 
Henients throughout the country as heino^ "a prac- 
tical uin from the oovernment to the hanks (7|' over one 
'"""'•■<■'' I'lillion dollars. This criticism has found ex- 
pressi()n hi such organs as The Farmrr.s' Advocaic and 
The (intiu drowcrs' (in'idc. It is complained ,nat tlii^ 
c'lirrency is not subject to a tax of any kind, as is the 
case in some other countries : and that, moreover, instead 
<»r l)ein,M' secured by i.-,,!,! ,„• u(,vrrmuent bonds, it is sim- 
ply made a i)referred lien a-ainst the oeneral assets of 
the baid-.. 'i'his. ace-i-dino- to the critics, makes the 
money of the depositors the securiiy for the note circula- 
tion ot' the countrv. 

A more hopeless confusion of mind tlian this i)oint of 
view indicates, can hardly be imagined. To beoi,, ^vitli. 
the cirndation of the baidxs cannot exceed the^})aid-up 
capital. ' \c( |)t dui-inii tin' mo\ in,<4' of the crojts. or whei; 
notes arc issued anaiust IIk central .yold reserves. In 
the second place, it is of (-onrse absurd to sav that tli< 
deposits are the srcurit_\- for the notes. A on'at |»ai't o( 
Ihc de|)<;si[s arise in Ihe lir>t instance throunh previ,)Us 
l"ans made by the banks, in which the chief risk is run 
b\- the baidxsand not by the depositors. Hut that is not 
all. II i-^eharocd that the Canadian ba>d<s make unwar- 
r nU (I |)rolits from the no|r issues: and so -icneral i^. this 

( ANADIAN r.ANKlN(i lM{()ni,l,M> 


npinioii that it is worth while to hriclly look into the 

.)2(). Profits (til })((iiL--ii()ic issues.- -As a rule, these 
( lities do not stoj) to consider that both deoosit aceoiiiits 
,111(1 note issues cost the bank a eoiisidei'ahle sum. Es- 
[Kcially is this ti'ue of the lattei-. The returns from the 
( .Miadian Iiaid<ers' Association show that the notes rc- 
i< i\e(l from the ennra\crs and tlie notes desti'oyed in 
I;M2 were as follows: 

I!'1'2 INcriMii from r,ii;:Ta\ t r.s 

.linu;iry $'2.7 Ui.O 1 'i 

I I liru-iry .'!.775,()()l) 

Miri'h l'j.-j;i;!.()(i() 

Vpi-il ;j.l-27,.s;i:! 

M ly K.')()().()()() 

.'unr 7.()l(t.()00 

. I Illy ,").8()t.0()."i 

AiiuMist ,->.!) I- 1- .01 10 

>' pt' Mihcr r).()7().l)0() 

<*(lcil)tr 7.f)f)<).oon 

\o\fml)t'r ().."):;o.iiO'J 

Dn'tinber (),K{.'i,()()7 


Drstroy. (1 




.f ■'Jp. 1-7 K086 




The ItanU-noie companies charge the Itatiks ^\M) per 
I. ()((() sheets for en^ravin^- notes. Also, the hank must 
pay for the cost of plates in the first instance. There 
.ire four notes to a sheet, so tiie i-ate of -SOO per 1. ()()() 
•sheets amounts to 2'^ '\ cents ])cr note. The cost of en- 
,ura\in<4' the notes for l'.n2 Mould amount to about •S'.il-).- 
<l(U). 'I'akiny- the a\ei-a,ye life of a |)late to be H yeai-s. 
Mif I'c would bi about s;{(). ()()() to add. rt |>r( ^eniinj^ tlie 
Marly dei)recialion of the plates. That would make, in 
lound numbers. S24.j.()0() a year foi- j)rintinti- the notes. 
I'lie average amount of tiotes in circulation in I'.M'J was 
^1()(K()0().()()(). Therefore, the cost ol' print. n^ the notes 









aiiioniitcd to alioiit '4 of one per cent on tlie average 

\ 'nder the system prevailing before the re\ ision of the 
act in 11»1.'}, eacli note was count(M-si<rnc(l in pen and ink. 
This wonid invohc a consideral)le expense, which \\as 
added to the general acconnt. To this must lie added the 
items of express and insurance on shipmentsof tlie hanks" 
own notes to the branches, and the cost of the shippiritjtof 
otiier banks' n(H.\s to the redemption centers. Then there 
is the work of the tellers at redemption centers in sort- 
in<i- up other banks" notes for the elearin"' house. These 
expenses must all be char<ie(l to note circulation. What 
the total of the expenses atti'ibutable to the note circula- 
tion alone would be cannot be accurately estimated, but 
they are \ ei'v considerable. 

Then a^ain. the batiks cannot consider wholly as reve- 
nue the funds derived from note circulation. ^Vith each 
SI ()().()()() ol' note issues. ])ro!)abIy 20 i)er cent is carried 
in cash and bank balances yieldinn- n()thin<r. iVnother 
•JO per cent would be in Xew ^"ork call loans netting- 
less than -Jl ■_. per cent. Even if the remainintr 00 per 
cent earned per cent, the <^ross revemie from .$100,000 
of circulation would not be much more than ^-l-.lOO or 
i pel' cent. The exj)enses enumerated would amount 
to 1 I ;j i)er cent: so the coiiclusi(Mi is reached that the net 
profit on tl ^ note issues would not be much more than 
■J' 1 per cent. Of course, the banks in the East could 
exist vww if Miey were deprived of the ri^ht of issuinn^ 
noti's. but thi'y would have to close up most of their 
l"ranche< in the West, rnder pirsent business condi- 
tions it would be mere folly to inij)ose conditions on ihv 
banks such as would increase the cxpensi' of issnin^ 
notes, lor the lnu'den would be merely transferred to the 
people in higher interest rates. 



Tlif <^i-aiii ti'adc. and notably the Western ,<;rain trade, 
iicnetits most uiider the present system of note issne. 
Tlie hanks make al)out .50 per eent of their advanees to 
tlie ^rain trade in the foi'm of their own notes. Hv 
( xpandin^' their note eirenhition SIO.OOO. ()()(). and other 
(•ie(hts to a hke sum. tliey can a(l\anee S-J(). ()()(), ()()() 
t(i the ^'rain trade. The demand foi- ad\ anecs from the 
hanks to mo\X' the erops i^ inereasin<^' year l)y year in 
the West. Any eui'taihuent of ereiht faeihties wotdd 
Nim])ly mean hi^^her inlei'est rates, (irain havers would 
he ohli^ed to operate at fewer points, and their power 
to huy would he lessened. Ilenee, in the end, as has been 
said, any ohstnele i)lace(l in the way of the haid<s in is- 
suin<>' notes at this critical period, oi- of raisin<i' the cost 
of note issue to then) in any way. would result merely 
in throwin<if a heavy burden upon the farmer. The ex- 
perience of the baid<ers in the Tnited States, Mith their 
;()stly bond-secured bank-note currency, furnishes con- 
clusive evidence on this |H)int. 

.")27. I'J.rccs.sii-c .siirphifi or rest fniids. — The Canadian 
hanks have I'ormed the hal)it of putting- profits back into 
the })usiness, in tile sha[)e of sur[)Ius or rest funds, to a 
dei^rce that has come to ])e thou^lit l)y many to be exces- 
sive. The act itself s))ecilies that no division of profits 
either l)y way of dixidends oi- bonus, or both coml)ined. 
i;r in any other way. exceedin*^' the rate of 8 per cent 
pel- annum. sliaH be made by a bank unless, after making 
the same, the bank has a surj>lus or rest fund ecpial to 
at least .*}() per cent of its iiaid-uj) capital, after deduct- 
iiiiT all liad and doubtful drbts. On Mav .'H. li)l.'}. the 
paid-up capital of the banks amounted to i^l l.),l)(ii).l..'{;j 
and the rest to SlOS.CSl .2:}(). 

The ])racticr of buildino- up larne reserve funds mav 
have been well enouuh iu its time, but it is liardh- in the 

e— \"II"^:iO 






best interests of either the hjuiks or the eountry to-{hi\ . 
In earher (htys tlie earning power of the hanks was much 
in excess of that of orchnary and reasonably secure in- 
vestments. Stoekliohhrs. therefore, asirh- from the pro- 
vision of the act. were content uitli the distribution of 
a \ cry moderate share of the profits. They were content 
to put the rest back into tlieir pn pcrty. for ihcir ultimate 
welfare. Hut to-day every form of investment expects a 
hioher return. The earninos of the banks, calculated 
upon the real amount of the shareholders' investments, 
are no lontrer exceptionally laroe. Moi-cover. in the 
early days there were \ery few forms of investment 
which compared with banking' in attractix eness: par- 
ticularly to well-informed invesloi's who feit that tiny 
could .iudoe of the calibre and (•har.iet( r (d' the meii 
in charge of the banks. To-day. ^\'\\]^ the enormous in- 
crease and di\crsi(ieation of corjioi-ate finaneinn-. there 
are scores of opportunities e(|ually attractive as bink- 
in^-. If an investor m ants as hi^t^h a rate of earninus with 
about the same deo-ree of security, hundn ds of kinds of 
preferred stocks are otiered for his approval. If he 
wishes sound security with a chance to jiarticipate in 
future o-alns. he may select any one of maiiv dilt'erent 
bonds, each carry ino- •, h(Muis of common stock. Ca- 
nadian municijjal bonds are risin.u' to a ooint where their 
yield compares favorably with that of bank stocks, and 
investment in them involves hardly any risk at all. It 
is hardly possible for banks to continue their past policy 
and expect to secure cap'ital subject to double liability, 
at tlie old divid'^nd rate. 

The banks are, as a niatti'r of fact, earning more than 
they ever were. These earninos may be further in- 
creased by economies resuitm»- from amalgamation, and 
agreements regarding extensions into new territory; and 




ly irdiK-iny tlic 'uiionnt of ca]:;ital iti tlie form r-i sur- 
)lns cm }) loved in unproductive ways — palatial office 
Innldino's and tlic like. '1 Ik carnin<,''.s arc not excessive 
iiy any means; hut they are large enou<. h to make i)ank- 
ing investment look attractive aloni>side of other tmn- 
<;pecidati\e entei'prises in the Dominion, if only the 
directoi-s would make a distrihutinn of a projjcr pro- 
pi'iiion o|' those earnin()'s. But instead of this, so small 
.1 proportion is allowed {o reac-h the shareholder in the 
I'nin of dixidends that the stock exchanores — which 
value a stock very lar<j:ely hy the yield- actually value 
nearly all of these hank stocks at less than tlie halance 
^lit-et show illy- of the shareholders' ])roperty — that is. the 
t.ipital. sui-plus. ami undi\id((i profits. 

Nor is this low return made .u'ood to anv extent hv 
riielon-cullin^y."" IJecent issues of new stoi k in the Ca- 
nadian hanks have heen made at prices so near to the 
market value of the stock that the "rights" were incon- 
-iderahle. The ohject of this ])oIicy. of course, was to 
I outmue t!ie huildin<>- up of enormous reserve funds by 
means of the liio-h premiums. The stronger and hetter- 
estahjishcvl hanks actually made their shareholders pay 
a price for new stock which jjrovided the l;aidv with 
money at less than jier cent. This, too, was on an 
i;i\ estment that made tiie purchaser liable to a loss ( nom- 
inal, it is true, but still a factor to be considered) ecpial 
'• the face value of the stock purchased. This double 
iia])ility feature cannot be ignored. 

Canada urgently needs more banking capital. The 
hanks themselves urgently need more capital. Tliey 
need it in order to increase their circulation, which is 
limited by the paid-up capital, if for no other purpose. 
I hat cn-culation is free, untaxed ai.d based upon the 
general assets of the bank. The banks now regularly 


.M().\i;V AN!) n.\NKI\(r 


excad tln' iMitaxcd cii'ciilat ion in rvvvy iiioiiili of tln^ 
yea.- ( Scptuiiiljcr to I-'ehriiary i iti wliicli tlicv arc \)vr- 
iiiittud to do so. Tliey are ])rat'ti('ally t'orced to do so; 
and tlity pay a tax of .) per cent for the pri\ il( yc. 
There is hardly a hank in Caiuuhi which eould not k( i r- 
oiiistaiuhn^' i'ii'cnlation {'(jnal to the I'nll amount of it-, 
eaj)itai foi' niru' months in tlie year and moi'e. 

liidei" these eii'enmstaiiecs. why shonhl a hank seek 
to maintain a I'est fund <'(|nal to its eapitah hy issuin.u' 
new stoeU at ^'JOO. anii nort' \\v issninu" twice the 
amonnt at •**'1()() it eould increase its circulation facilities 
twice as nincli. ui\ c \aluahlc ' i-i;^hts"" to its stockholders 
tliat w'ouid make them feel an int(.'i-est in the expansion 
of the haid-; s husiness. and 'ivc the ci'editoi's of the hank 
not only cMpial secui'ity hut a n'reat-r security hecause 
of the donhU' lialiility extendiui^' to twice as lar^e an 
amount of ca])ital. I'eri : ps such a di\ision of pi'ofjts 
would he extreme: hut at any rate new stock should 
l)e put out a y-ood deal under the s-joo mai'^^in. 

In the formative days of Canadian haiikin;^' fear ol 
the (loiiMe lialiility was undouhtedly a stroii;^' diterrenl 
a<4ainst the |)olicy of lar^i- ca.nital and a -mall surplus, 
'riierel'ore. the liuiiU ^f the sharcholdcrvs wei-e put into 

tlu' I'est and not the capital tol' the plU'pose of keepiuLl 

the douhle liahility (lov\n. Uut the well-estahlished 
hanks are now on m» lii-ni a hasis that the douhle liahil- 
ity is hardly a factoi- in i^ovcrninu' the clioict of inxe-t- 
nient. It is hardly to he supposed, foi' example, thai 
I lu luarket p(is!ti(»n of the Ho\al Ha(d\ would hr iui- 
])an'. d if the entii'e «•_' 1. 000. ()()() of comhined capita! and 
rest w(i'e entered as capital, uistead of heiny'. as now. 
SI l..")()0.(MM» (ajiital and srj. .-)()(>. OOO yrs\ . 'I'lic douhle 
lial>dil\ o| the s|iai< liol{|( 1 > wouki iie nicreascd h\- spj.- 
oOO.OOO 1)\ the chau'ic; '» it the clianc<- of tla extra 




Ii,il)ilily vwv \k'\\]}X ciirorct'd i< so I'tinotc^ as lo Ik almost 

III nli!4il)k'. The stocklioMn- would rcccixc the saiiu' I'c- 
tiii'ii. althoiio'li the rate per cent would he lait in two. 
( >ii the othei- hand, the hank would he ahle to is^ue notes 
lip to $24..()()(),()()() it it so w ished : m li.reas. at the present 
iiiiie, it must i)av a tax for excess issue dui-inu the mo\- 
iiiu ol' tlie crops. oi- (k'posit {k)llar I'oi- dollar in uold or 
Dominion notes in the eenti'al i'eser\es. 'l'lii> example, 
mT eoui-se. is ustd merely hy way of illusti-at ion. While 
llie hanks will hai'dly turn Hieir sui'plus into ea|)ital hv 
(leelarin;;- a stock dividend, it is time that the hnildint^- 
!ip of excessive i-esei'x tvs reeei\ed a check. 

.VJS. Profits (if tin ('(iiKulidii hdiihs. — It is a conunon 
( liai'^'c auainst the hanks that they ai-e making exei'ssi\c 
prolits. as their juinual statements appear to sjiow. and 
that til' ])uhlic is paxinu' hio niueli to lia\r its liankiiiu' 
husiness doni'. To a eei'tain extent tin- hanks ai'e them- 
M |\(s to hiame for the sjiread of this opinion. They 

iK |)i'one to hoast of their prosjxi'ity. especially when 
iluy sick to attract new <"i])ital. .\n exam|)le will make 

Irar the situation. The ru t prolitsof the Canadian liank 
"I Commerc'.' for I'.M-J wci'e S'J.KOO. (»()() on a capital of 
>^ ;.").()()(». ()()(», which is somewhat mori' than IS per cent, 
itiit d' the sm'plus or I'est is included the pi'ofit would 
ii.i\( to he computed on S-_>7, .-)()( ).()()(» and would he tlien 

'|ual to o!ily a little more than 10 pir ciiit. It seems 
elea!' that the only fan- way to estimate the prolils is to 

luliide tlit total m\ estnlent^ of the sliari holders. \\ hether 

iiat in\estmeiit apjiearsas capital or rest fund. 
In an attempt \<> di<»\\ to the Committee (iii Hankiui^- 

lid ConiMierce that the hanks are not making < \cessi\e 
|'io( its. as compared with other enter pi'i si s. .Sir I'jlmund 
"\'\ aii^( r iiad prepared one liunch-ed liaianci sliiels of as 
iiiaiiy typical cstahlishmciits excluding real (^tat' 



~/ ■.-.if • 





\ i ■ 1 

? t! 


rancliiun- and )':irmiii^ wliicli wt^vv funiislic'd h\ 'us- 
toiiiei-s of the C'aiiaditui Hank of C"onniit!-cc. 'I'iu-se 
.statements eovered the eariiiii<^' of estahhshments in 4'.> 
different Hne# of industry ■ranoinu' from eraeker fac- 
tories to eoal mines'": and repirsented an investment nl' 
^TO.OOO.UOO. Thev \\ei-e. moreover, eoneerns of axerasi-e 
normal prospt'ril; . chosen merciv with the v\n\ in view 
of disc()verin<i' the average proiits of an average husiness. 
In each lase it was foimd the avd'aye ijrolit was hiu'her 
than that of the haidss. althou-^h in some eases it was 
ajiproximately the same. 

Sir K(hnnnd Walker further presented a statement to 
the Committee analy/in^ the ])i-ofits made hy the k-ad- 
ing hanks. He found that the eai'ninns ,,t' the hanks on 
their ca|)ital and surphis eomhincd was somewliat in 
excess of '.» per cent. The profit.'; (not (hvidcnd-, i in 
rehition to the mai'ket price of the stock ratiL'c from 
• i' ■_. |)er cent to I'J |)er •cnt. The percentage of the (h\ i- 
dends to the maiket price of the stock is. in geiierak 
Itetween .') and .'>' ■• pei- cent. 

'I'hc (jucstion may also Ik re-^aidi-d from another point 
of view. 'I'he pr.itits made hy Canadian l)aid<> on the 
cntiix' assets which they control aitioiuit to l.i'O per 
criil. and ran.ue. in the case of IJie itidividmd h.-inks. 
fiom .!t:i to !..-)<>. If it iv c(.n>i(lercd that a hank could 
make on its capital and siirphis i\ per cent in ;in\ otlu r 
inve.stmeiit Imsincvs. then th-- pidfits ni.ade on their otli( r 
assets, v^hicli th.y control in virtue o|' Ijie peculiar fea- 
tures of llie haidxin^i liiisiiie-,s. wiiiild .averaue sonHuhen 
I'clw.rn .-J,-) .iiid :Ut per cru\ 'I'ha! iv to s;n . tin \ make 
•' I't'l"" niore tha,i one-(|uai-ter of (uie per c( nt profit on 
tJKir total .ismIs. if it is considered (i pei- cent m;iv 
'" aiiowed (III ih( capitai and sin-pliis e(pntril)uted hy 
the shanlioldt IS llu uiselv cs. This is summari/.:d in tin 




t'.illouing table, iji which "capital"' includes capital rest 
aiui undivided i)rotits: 

l^rotit on 

B:uik Total 

Conimcrct' ... 1.1! 

Doii.inion ... 1.1 t 

!1 iiiiilton ... 1.01 

I li I'llilaga . . 1 ,,;7 

liiipcri/il . , . \.:i6 

Metropolitan. 1.23 

Montreal . . . 1.0(3 

M. rcliaiits ... I.j9 

\!nlsons .... 1.-29 

N.itionale . . . 1.35 

Nova Scotia . . \ .36 

Ott.iwa I.'JG 

t^R-bcc 1.33 

Hoy, si 93 

.-I inilard .... 1 . 1 ,' 

I'lronto 1. U 

I nion I .(I-,' 

Profit, After 

on Capital 

on Capital 

Plarning.s on 
.Market Price 
(.r Stock 


01! -Market 
Price of 


10. l.j 




7. SI 

1 . 1 1 
































1 1.81 






























In view of all tlii< it is (■\i(lent that Canadian hanks 
•lie far from niMkinti cxcessixc profits. What ett'eet the 
present rate of dixidends and piofits \\ill haw in at- 
lraetin<2' "cw capital into the hankinii' field can onlv 
he surmised. New hanUs will nndoiihtedly he started; 
hnt they \\ill he sttnied hy people who will he willinu; 
t 1 wait for a rrtnrn on the capital in\ested. Xew 
I tatd\s ^cannot immediately earn and pay a dividetid. 
That is praetieallx impossihlc in Ihe.-i' days. Many 
hanks lia\e heen starhd in the I 'niled States within the 
last twenty years: hul lh<y hast heen started on tluir 
career hy men who km \\ that their moiux could n<it 
earn a dividind. with safet\'. for three or four vears. 
The |irolits ha\e hct n put into IIk hjink'-. .Manv of the 
concerns, when earefnIK manaued. Iia\e heen notahlv 

I ' 


»5(i M()m:v and R.\\Krv(^, 

successful: and for the I'litmr. luw Canadian hanks must 
I'ollow the sanii' c(»nsci'\ at i\ f hues. 

.32!). liaiih' nicr^irs aud (ii/iiil^^di/iiilKtN.s.- -The opin- 
ion lias heen in(histriously spread hy t!ie i-adieal element 
in ('ana(hi that the hanks form a liu«>c ■"moiu y trust" 
and are wockino tooethei- foi- the exploitation of the 
country. It is niaiiuaincd that the process has heen fur- 
thered hy recent hank amai^aniat ions. This |)rohlem 
occupied a <xi)in] dial of attention during the last revision 
of the act. and is ther<t'()i-c worth considci'ino". 

It is perftctly true, of course, that the Canadian 
hardxino' system is made up of institutions of relatively 
larov capital. That is seen hy a ,uiance at the following 
tahle which shows the am(!iint of capital and surplus of 
the kadiu'i' hanks: 

'^•■'"'^ (',i|ii(il H<st or .Surplus 

^'""''■ral .-fKi.diKl.ODO .^1 ().()()().( )()() 

( omiiK rcr l,"),0(l().(l()l) I'-'.riOO.OOO 

Htiya] 1 l.:)()0.n()o !■.;., ">()(). ()()() 

'"'I'Tial ( 

No\,i .*^(()li;i .").<),")7.;5'20 l().8.'{().2i8 

Doiniilidii J. .'!.')(). 'J'iT ()..'!,")(). •J'iT 

ruronto ;■■>.(>{)().()()() (i.OOO.OOO 

That the tcndcncx in i-cccnl years has heco to riduce 
the numher of hank< and to inci'ease tin n- si/e cannot he 
disputed. In se\(i-al easts the si/e of the liank Iris hecn 
increased hy amaluamat im; with it weaker institutions. 
Most hatdscrs at;ree that it is a n'ood tliiuLf to remoxc a 
weak hank hy mei';4inL;' it with a ^IronLiCi' one. 'I'liev 
lia\(' not hesitated to pid their tliccM'ics into practice. 
'I'lu' n.Mid< of Montreal hasahsorhed tlu'ce: the Canadian 
Hank of Commerce, t'our: the liank of \o\a Scotia. two; 
and the Ho\al Hank. two. 'I'hesc consolidations ha\c 
heen fornud. Iiowi'vcr. witii the oh jet I of seciu'inL>' a 
sfron<4' chain of hranchi s throughout die whole country. 



I 'nr example, in llie rccriit iiuM-<4er of \\\c 'ri-adti'- liaiik 
and the Royal Hank the t'ornui' liad liranclus i-ontimd 
tor the most part to Ontario and the middle West, while 
the Royal was stioiif^iy represented in the maritime 
I)ro\inees and on the Paeitie Coast. The union of these 
lianks formed an institution with hi'ani'hes widely seat- 
tci'ed througliont the len<4th and hreadth of Canada. 
The hranehes were (]u{)lieated at fifteen points onl> : 
liiit as many of these points ai'c eommn-eial eenters 
already well supi)lie(l with hank-, it is hardly possihle 
that eompetition will he lessened hy the union ol' these 
two institutions. 

Now, in s|jite of the eritieism aroused l)y these merg- 
ers, it is noteworthy that the Canadian hanks have ex- 
panded in all direetions in recent yeai's. Thi> a])|)!i(.'s 
not only to their increase in capital hut also in the facil- 
ities for haid\in;4' <'tfered to the people. This has hecn 
due to the i'ai)i(l di \clopment of the country, and to the 
lai-<4e capital in\i'stn)ents that h.ive hecn made. The 
iiumher of new hi'anehes that ha\e hecn estahlished in 
all dii-ections is certaitdy remarkahle; and the ma |oi-ity 
of these hranehes l!a\e (piickly justitied their estahlish- 

Hut. .so far from hein^- tnie thai the h, iiks ha\e 
foiMned any sort of ti'ust. many parts of the Dominion 
-eciii to ha\e evi'ii excessive hankin^' accommodation, 
riie hanks themsehcs have f( It the prcssuri' of this com- 
[jetition. and aiv not rushin;^ into new tt ri'Itoi'\- as thev 
did a year oi- two at>(). 1 1 is desirahle th;it hanks, heforc 
!'! ancliiii<4 'lul. .should iiioicMiyliK- salisfv llieiii>el\e< of 
the need of additional hanking' f;iciliti(s in the new dis- 
tricts; otherwise, as has hecn said, undue com|)et it ion is 
the result, 'I'hi^ i-aiscs discount rates in the end and 
causes the hanks to undertake undesirahlc hiisiness. The 

1 ■ 



danger at tlie present time is in the undue niultlplicatiun 
ot'braneh hanks, rather than the reverse. If the hanks, 
especially in the West, wijuld uork more in harmuny 
with one another, it would result in more reasonable 
banking rates and I'aeilities for their customers. 

In order that the pnhlie interests may be safeguarded, 
however, the Act of 1!>1.'J provides that ikj agreement 
t)y a bank to sell the wIk^Ic or any porti(jn of its assets 
to another bank can be made luitil the minister of tinance 
tirst gives liis consent. Mr. McLeod. late general man- 
ager of the liank of Xova Scotia, and others as well, 
maintained that the assent of parliament to a |)roposed 
merger should also be secured: but the precautions taken 
\vould seem to be suthcient. If the matter became pub- 
lie and were discussed in parliament it would manifestlv 
prejudice the jjosition of the bank that was selling out 
its interests. An attempt would be made at (Mice l)v the 
ftther banks to get part of its business: and, as a result, 
it is extremely douotfnl whether the agreement could 
be put through. And there may be gXHxi reasons why 
it should be put throngh. If a bank gets into a bad 
eoiidition. it is sometimes necessary that it should be 
absorbed by some other baid<. thus sa\ ing the ])ublic 
from the shock to business that would arise from a bank 
failui-e. That j)oint should not be (»\erlooked, for it is 
important in considering the (|uestion (if consolidation. 

o'-U). lirtuicJns in foreign cotintriis.- The Canadian 
banks ha\f taken achantage to a c-onsiderable extent cU' 
that pro\ision of the law which p< rmits them to open 
branches \\\ foreign countries. A\ tin ( ikl (if WWl they 
had I.'{ branches in Xewfoundland and Wl branches else- 
whcie principally in the I'nited .States. Mexico, Cuba 
and tli( Mntisli West Indus. On the whole, this has 
resulteil in alfording fail' facilities for the extension of 



( iiiada's trade. Some o|)])()siti(»n has develoj^ed against 
'his i)()licy, and pi'oposals lia\e arisen to tax capital 
loaned by Canadian banks in t'oreij^'n countries. For- 
tiiiiatei\-. at the hite revision of the act, this sno-o'estion 
was not carried into eH'eet. Xolhin^ conhi be jjained by 
la\in^' the funds ol" banks employed abroad. i\)v the 
i'lisines'^ that the banks carry on is to the direct advan- 
taue of Canada, as ueii as to the banks. Vov example. 
the Koyal Haidv went into Cuba in 1H'.>1) and now has 
I'.t branclKs there. In IHOI Canada's imports from 
( uba amounted to .$.'J4.*J..'}74 and exports to ^.578.013. 
Ill r.>l'2 the correspondin<i' fioui-fs were ii^l.TTO.HT^ for 
imports and ^'2AV.){},77^ for exports. While, of course, 
tilt banks cannot be credited \y'\[\] this very large gain, 
\r! thev ha\e undoubtcdiv tireatlv aided exchanu'c of 
[Moducts between the two countries. 

The lianks in Cuba and the W'esI Indies are not de- 
pindent upon Canadian mon>y, On the c-ontrarv, de- 
|ii).sits thei'e are in excess oi the loans made. 1 1 would, 
tlierefore. for this reason among man\ others, be un- 
\nse to discouia<_!,e Cana('ian banks froui opening up 
liranclus in these islands. The \ation;il Hanks of the 
( nited States are now permitted to establish bi-anehes in 
loieign countiies. I lad tluy always bei n al>li ti. do >,(», 
llie foi-eign trade of that country would bi' greater than 
it is to-day. It is estimated that -S'JOO.OOO. ()(>() of Anu r- 
lan ca])ital i^ inxfsted in Cuba alone: but it is the 
Canadian lianks that baxc lakt n greatest ad\antage 
"f the opportimities of1'ere<l in the baid<ing field. The 
hanks pay interest at the rate- ol '4 per cent on de|)(jsits 
:ii Cuba, and charge an a\erage of 7'- per cent on 
f'»ans. .Vbout 'J.') percent of sui'plus deposits is retained 
III these islands: the rest is loaned on call in New N'oi'k. 
Ill no wav does this t'oreign business weaken the po^i- 






.MOXr.V .\\i) UANKINd 



(ion of tlic hanks in C aimda. il need lie. tlic loans in 
\t\v ^ ork could he nia(k' a\ aihil)lc in a iKricd of [lanic 
in this countrx'. ('((II loans in A'.tl' )'(irh\ On Mav .'51. lUi:}. 
tlic call and shorr loans of Canadian hanks, ciscuhciv 
than in Canada, ainoinitid to ■•^1m;.1.)1. •_>()<). 'IMicsc loan> 
arc \'i)v the most part made in tlu' City of Xcw Yovk. 
'J'licy ha\c often hccn severely critici/cd: hut. on tin 
wliolc. this ])olicy can he jiistilied. It is necessarv to 
keep a coiisiderahle part of a hank's k)ans in such licjuid 
ioi'ni that they may he rcali/ed n|)i)n in anv emi r^cncv 
that may aiise. Dni'inu' the tronhle of IDOT tlie foreion 
loans saxed the situation in Caiiada. \\\ [hv (.iid of I'.lOT 
the Canadian hanks had exhausted all the moiiev l)e- 
lonoitio- to them ahroad. and had imported out of tli( 
(lc|)osits in othei- coimtries .(»()(). 'i'lie hanks dn 
not lend at call in \e\\ ^'ol•k to secure exceptional pi-oj- 
its: hut chielly to pi'cnrx e a cei-tain poi'tioii of tlitii' 
loans ill a hio|,|y Ii(|iiid fomi. A< a laile. the l)anks lend 
money in Xeu York at a much lower avcraiic rate than 
in Canada, 'i'he jiioh lates of interest, so often r<t'errcd 
to. occair at rare oi'casioiis only, at a time of excessiw 
monetary striii<^eiicy or of panic, and do not matcriallv 
att'ect the avera«i-e rate of int<i( st ea.rned. Morcoxer. 
at times of hioli interest rates tin hanks air almost 
always withdraw in,n' money from New ^'o|•k. instead of 
scn(hii<4' it thei'c. 

It is the pow( )• to withdraw monex at siicji tinus 
which enahles the Canadian hanks to support their ( iis- 
tomers. !t is. also, lai-ucly Ixc.nisr of llij-, power that 
no pa!iic has taken place in Canada in^ ivcent tiim -,. 
If New 'V'ork itself caniiol furnish u'old. as in I'.Mi;. 
the same results are secured in sellino stcrlinu' hills of 
exchaiioe furnished i)y New ^ Ork. '1 c no],) j^ then 

( ANADI.W HANKIMr ri{( )HLi:.MS 


MCiirt'd ill London. The (ilijcct of these eali loans in 
\( \\ ^'o!■k, tliercforc, is not so inneh to enlarge the {)rol'- 
iis ol' (anachaii h;;nk-. 'S to enal)le them to support 
llnir enstoniers in time ol' stress, hy Iia\ in<4' a eonsid- 
I rahle pai't of their assets in a h(|ui(l t'oi'in. The eall 
io.nis thus t'orni an im|ioiiant i)art of the Canachan 
ii.inks reser\'es. In the hist analysis it is mei'i'lv makinii" 
Use of neeessary rese!'\ es that would otherwise he lying 
u-cless in Canada. 

.y.i-2. Call loans in Canada.— ih) May .'H. 191.'}. the 
(all and short loans on stocks and honds in Canada 
amounted to !^(;t». •»«•_'. .UO. A o'ood deal of niisunder- 
slandin^' has arisen over this item, heeause ol' the dit!i- 
inlly in aeenrately detininn what is meant hy the term 
"short. ' The oilicials of some hanks consider that only 
(hose loans payahle within ten days can j)roperly he 
iiiehided under this heading: \\liile in other cases loans 
of .'}() days Ol- e\en iwo months are included. It all 
dt peiids on the di gree of conservatism of the dilVerent 
liankers. Some ixw of the opinion that only loans to 
stoekhrokers should, strictly speaking, he termed "call" 

In the more eoiiser\ati\e lianks. it is true, it is the 
custom to di\i(k' the call or demand loans into two 
chisses. The tii'st class is styled "strictly call loans" and 
it inchides only the loans made strictly on call to stock- 
lirokers on honds and stocks. Ail other demand loans 
should go into the second class. v\v\i when tlie\- are 
secured hy honds. stocks and dehentures. When ih;'t 
i'raclite is foll(»\\ed ii makes foi- a clear, true statement 
ofall'airs. In studying the position of a jjarticular iiank 
the- d( positors or the general piihlic are accustomed to 
eonsidering the call and sh(trt loans as an im])ortaiit part 
if the restrxe of (|uick assets. When the hank |»reseiits 






M0M;\ AM) J{.\NKl.\(i 

its statenit'iit. hy inttiviKr it (Ifclares that tlie amonn^ 
shruMi in the call-loiiii (•oliuiiii can he taken as quid 
assets: and wlien this lunount is made u|) of strictly 
call loans to stockhrokers that is undonhtedly the case. 
If it wished to do so a haidv ininrlit put in consider- 
ahle loans, uhich ai'e really s|o\v. in the call-loan col- 
umn. In the city hranches there are always a 
consideralile numher of loans oraiited to jjrominctit 
(hrectors of indnsti'ial and f)ther corporations on the 
stocks of their own companies. These horrowers have 
no intention ot the stocks: in fact, they could not 
retani control o!' the eoi-poration it their collateral were 
sold. So. as a matter of fact, in actual practice, the 
loans sometiniis run alon.o- from y(>ar to year, althoutrl) 
tlie\- may lu payahle on demand. Now. such loans 
should not he considered (piick assets: they are not 
meant to he .such hy the horrower. and should not l)e 
considered so by the hanks. 

Then, aoain. the hanks have nearly always a num- 
her of loans on stocks and bonds cai-ried by "princi- 
pals." That is to say. the <lea]er, instiad of carrying- 
his stocks by means of a broki-r's loan, carries them 
ill his bank liability account, 'i'lic l)anks prefer to deal 
with a broker instead of with a princij)al. as it is always 
nmre diflienlt to .sell out the collateral pledoed Ijy'a 
principal than thai plcdoe<I by a broker; forthe bor- 
rower may be an intluential customer, and if the bank 
sold out his collateral against his wishes it would run 
the risk of losinn' a valuable commercial or industrial 
account. These loans, no doubt, are payaltle on de- 
mand; but they are not to be compared with the strictly 
call loans in point of view of fluidity. Yet. in mnst 
cases, all these so-called demand loans appear under the 
heading of "call and sb.oit loans on stocks and bonds in 



('anacla."" Clearly, the practice should he chanoer] so 
that only genuine call loans woulfj he counted as such. 

o.'J.'i. l^ndcrxcniins and promotion of corporations. -- 
It ".as charged hei'ore the C^^immittee on Bankintr and 
( i^tiinierce. during' its sessions in 191."}, that the hanks 
iiave heen closely allied \\ith many n(\v enterprises: and 
tli;!l liu<ie new industrial conihinations ha\e heen |)!'ac- 
tically financed hy their funds. It was said, too, that 
the (Teneral nianaoc rs and directoi-s of some ])anks have 
profited 1)} these promotions. This was notliinf; more 
than a vaoue. n;eneral charge. concernin<T the proof of 
\^hich no e\i(lence A\as snhniitted. Xevertlieless. the act 
\*as amended in such a vay as to make it a penal offence 
till- anv l)ank official t<t accept honiises or <nfts for iii\in<r 
iccommodation to patron^ of the institution. 

The hanks, however, have ne\er denied that tluv have 
furnished capital to grouj)? of capitalists -^^ilo were start- 
ing- new industries, and v'- needed temporary accom- 
modation durino- the under itin<^' of the securities, he- 
lore these could he (lis])ose(l of to the investing ])uhlic. 
Such large enterprises could not he started in Canada 
unless hankijig facilities were ])rovidei' during that 
[•'■riod in which capitalists have underv^ ritten large 
hlocks of securities of the new corporation and have not 
as yet disposed of them — that is, pending tile period 
in which tiie stocks and ])onds can he sold on the mar- 
kets of the world. Of course, everything in such a case 
depends upon the character of the underwriters; whether 
they are men who are financially responsihle, whether the 
hanks hclieve these men can market their securities, and 
\\hethcr they understand the nature of the underwrit- 
ing contract. During the interAal hefore the securities 
are marketed the hanks consider not only the nature of 
ihe collateral j)ledge(l. bnt the financial Standing and 



:'- Si 


.M()M:^ AM) |{.\\KI.\(i 

iiiU'^iity of tlu" capitalists coiiccnicd. Otlicrwisc, as- 
sistance luiju'lit l)c L>i\cri to men of sti'aw : and, as a re- 
sult, the l)aiiks ini<4lit find llieniselves owning the enter- 

1 )urinn' I'ccent years Canadian institutions ha.\e aete(| 
as hankers for laru'c in(hrsti'ial undertakings in Mexieo 
and in South American countries. They have heen 
named as such in the ])ros])ectuses of tliese corporations; 
hut. strictly s])eaking. this has meant nothing more tlian 
that they have lield the I'unds ol' these eom])anics. Of 
course, the hanks have also advanced capital on undei- 
writings oj' fliese cor])orations. l)ut not in the sense that 
they ha\(' pro\ idt'd the initial eapitak l-'or example, the 
Canadian Hank ol' Commerce niade loans on two very 
important underw ritiiigs made in P'.ngland of the Hio 
and Sao Paulo enterprises. 'IMie loans \\ei-e niade on 
Canadian nndci'u i-itings in connection \vith these com- 
])am'es: under\\ritings of a class that were actually 
])lace(l on the market. The lai'ge Canadian lianks arc 
always willing to lend money on good underwritings 
when funds ai'c plentiful: .just as they make loans, on 
securities alone, to financial houses in London and else- 
where wlio aie ahle to covenant that when the payments 
due on the undci-w I'itings are made they will re))av the 
l)anks. That is considered ordinary banking husiness 
which the larger hanks like to get. lU'garding the South 
American enter])rises as a whole. Sir Edmund Walker 
has stated that Canada its<'lf has little of its own capital 
in them. 'I'he money to huild the entei-])rises at Rio 
and Sail l\uil(> was found ii' Kngland. Helgiuni, Switz- 
erland and thi'oughout the contineni of Europe. The 
Canadian haid<s have lent moiiev on the securities wliicli 
wei'c sold in Europe; hut they have not directly sup- 
})orted these enterprises. Of course, the hanks have also 



directly particiijatal in tlu- iiiidcrwriti!!^ of pnhlic securi- 
ties "nu!iiici|)al. provincial and Dominion. Most of the 
l,ir;^'c Canadian banks associate tlieniselves with the un- 
(lertakino- wliencver the Dominion o()vernment 1)()ito\vs 
ill the London money market. 

The <r()vernment returns of May 81. 1!)1.'}. show that 
the Canadian hanks held on that date: Dotninion and 
provincial <4overmnent seein-ities. >^!».()()l».H(;r. Canadian 
imim'cipal securities and Hi-itisli and foreiuii public se- 
ciwities. J^-J.'J.H-JTJil.'J: railway and other bonds, deben- 
tures and stocks. •S(;7.()21..-)41. The l)anks have, there- 
lore, a considerable and direct interest in many inchistrial 

.y.ii. Loans to dircctors.— Vudvv the act the share- 
holders may make by-laws linutin<^- the amount of a loan 
to any individual or corporation. As a matter of j)rac- 
tice tliis is left to the directors to decide. In the Tnited 
States national baid<s are not permitted, under the act. 
to lend more than 10 per cent of their paid-up eai)ital 
to any person or eori)()ration. An attempt was made 
to introduce some sucii restriction in the revised Ca- 
iKidian act; but it was stron<>-ly opposed by the banks 
and failed to carry. An effort was made, too, to place 
a limit on loans made to the directors of banks; but this 
amendment was also defeated. 

It is true that several small banks have failed be- 
'•ause the chief executive ollicers either misai)j)ropriated 
iir speculated with their funds. Hut that has hai)penc 1 
generally wiiere the institution was a "'one man" bank. 
In the case of the failure of the Ontario Baid< the «'en- 
' ral mana<4er speculated with the banks funds in Wall 

Strri'f- mihI flic /lii-<.<.f<ir>.' It ,.!..> .,\\...v..A ^.. 1 1.^, 

- ■ . : ^ • : . ..,..;. ; ,,^ L 1 i • i -^ ^ 

liM'ent in safeouardiiio- the bank's interests. The Sov- 
ereinjn and the Farmers" Hanks were forced into liciui- 



(lation tlirounli exces-iive and speculative investments 
made npnn tlu- authority of the directors. However, all 
these I'aihires occurred i-atlier tlir()u<xli t!ie malpi'acticc 
ot the batd<s" chief officers or thrrai^h an error of judji- 
ineiit on the part of the directors — as in the case of the 
Sovercij^n Bank — rather than because of loans to the 

The hanks seek to tret men to act as directors wlio 
are ])rominent in the husiness community. The accounts 
which these meii brinfi; to the banks are anion<x the nio^t 
\ahiable the hanks ]iossess. The imsiness of the directors 
is a \ ital asset in building up a baid<. Now. if a director 
could not ffet a loan from his own bank it is just possi- 
ble that he would lose interest in its operations, and 
refuse to act. ;nid thus the services of the most desirable 
men in the eoinmtuiilN would be |e t to the institution. 

It has bei n charj^cd that directors who act for other 
corporations also in that capacity (li\ ert the baid<'s funds 
to the enterprises in w Inch 'hey ai"c interested. It comes, 
in the last analysis, to a (|U( stion of the advisability of 
interlocking directorates. 'I'his is a situation that must 
inevitably arise under modern business conditions. Men 
of l;n'<i'e cajiltal are interested in many enterjirises: and 
there seems to In no uood re.'ison wbv a director of ;i 
bond house, a trust company or .in iftsurance com|>an\ 
should not also ha\e a seat on the board of a bank. 
Xor should they Ix.' discriminated afjainst in s-curinu a 
lf):m I'oi' th-.'mselves or the eorpor.-itions in which tluy 
ha\e an inleitst, provided, always, they rccei\c no 
favors and tliat the loans are leuaily made. 

As nas been said, ro limit is pliucd in the act upon 
the amount of a loan to any person or cor|ioratioii. |! 
appears to be the ^encr.'il consensus of opijiion ;uni>nL; 
bankers and business men in Canada th it nothinu' of am 




\;ilue is p'ained by .such restriction. Mr. TI. C. McLcod 
qiajTested to tlu> C'otiimittce on Hanking and ("oinnicrcc. 
(Ill the occasion of the last rc\ ision of \hv act. that a 
limit of 2.5 per cent of the haids.'s caj)ital should he im- 
! (vsed. The sufjofcstion met ^^■ith some aj^proxal: hut. 
the \\lioh'. it was felt that any hmitation upon loans 
\MiMld not he in the hest interests of the hanks oi- the 
{ountry: and that, in any c.,sc. it would he dilticult of 
(iiforcement. In a word, it is i'elt that fluidity and secu- 
I'ily are more imi)oi-tant than tlu- mere a-nount loaned. 

.Y'i.'i. Haul's ami the trust ct iiipanicft. — Some of the 
Canadian hard<s. following American precedent, have 
istahlisiied trust companies to take care of husiness 
vli!(h cannot iic leoally undei'taken hy them. Sir Kd- 
iHiiiul Walker ha>; <^i\en reasons why this policv ap])eals 
t the hanks. Tjie Canadian Hank nf Commerce has 
not estahlished a ti'usf conipany. hut it ha > at times hecn 
inclined to do so. This hatd< has nearly !^"J. ()(»(». ()(»() in 
pension funds helonoinn- to it- otfii'crs. which is larj^cly 
iii\est(<l in mort<.,M<>-es in wcsfci-n farm lands. It oh\i- 
(Uisly iinohcs much labor in looking- after such lai-^e 
investments. Such a fund nnnlit well sfr\(> as a foun- 
(Lition for a small trust company, in l-aiM-land. espe- 
ciidly. many investors come to the Canadian Hank of 
Commerce v, ho \vould like to \( ]\(\ funds on ucstei-n faifus 
ill Canada, and in other ways. These tr.ansactions ean- 
.lot be undei-t.aken under the bank act: and therefore a 
cdnsiderablc amount of profitable business is lost. Other 
Canadian banks found themselves in the same condition. 
iUKJ or«ianized trust companies to take care of this class 
iif l)usiness. Of couise. it is another <iuestion altooctber 
if the tiiisl eiimpany dipcnds on the banks for funds to in ways not enntemplalid \>\ tli< l»ank act. Aside 
from tliat Ihei-c dors not a|)pear to be an\ it asnn why 





M()^l:^ and haxkint. 

th'J hanks should not or^aiii/c ti-ust coinpaiiirs and IkiM 
stock in tlicin. Tlicix' is no reason why shareholders f>\' 
a hank siioiild not permit the formation of sueh a com- 
pany, and ^u in<4' to it the husiness that cannot l)e legally 
undertaken hy a hank. 

It has hei'ii c'harj^fd that the direetoi's of some of tin 
^. anadian hanks are also directors of tlu'se suhsidiaiy 
companies, and that they exei't an undue inlluence in ><- 
cuiin<i' loans from the hanks for them. Hut the conten- 
tion is hardly hoiMie out l)y the facts. As a rule directois 
are not favoi'cd aho\-e othei' horroweivs. Hut they ouiilit 
not to he discriminated ayainst merely iKcnise they arc 
directors. In tlu' case of the l''arniers" lank it is trm 
that it was ruined l»y an excessive loai. )f S7(((t.()()() In 
the Keele\- mine: hut althouLih mistakes haxc heeii niadc 
it does not follow that thousands of other lei^itimate ami 
j)rofitahle transactions should he foi'liidden to the hanks. 

.').'{(>. I nil rest ch/ira.'i-'^ in tlic Wist. The act permits 
haid<s to chai'^^c 7 per cent on loans; hut no hiuiiei- raic 
is reeo\ei'ahle at law. This is a matter o| more oi- |^s^ 
academic importance in the I'^ast : hut in the West it 
has h((ii an impoiiaut i-sue amon<^' the ranchers aiiil 


Mr. (I 

iipman. edi 


the ( 

I rath 

(ini:\.(rs'(^i/i(l(. produced ex idcncc hiloi-c thr ('iMiiiiiit- 
ti'i'on Haidsin^ and Commerce ;it ( )ttawa in April. I'.M.'f. 
that the hanlo had heen charjL'in''- intciTst in the \\'( si 

di th 

wa\- froni S to !•_' iter een 

t. I 

n sonic cases it wa^ 

much hi;4her. especially on small loans. Some hanks 
have chargt <l one dollar a tuonth on a loan of ><■_',"). I'lii 

axera^c r 

lie. Iio 

>m M to I •_' j)( 1' (■( nt accord- 
in;^ to t lie (list r lets w Iieic tlu hank is located and the p< r- 
.son who receives the loan. 

The people of tin West feel that they have a griev- 
aiue in t!iis, and lia\( souaht to h;u( the late fixed .it 




7 jK r cciit ill all {'ascs. It lias liccn c'niisc-i-\ ati\ rlv t-sti- 
iiiatid. li()\\c'\rr. that it costs on an a\(.Ta<>c 2 per cnit 
iiioi'f to can-v on liankiii<^- in the \\\'?t tlian in tiu' Ivist. 
On tiu' IVontiir and in the rciiiotcr districts tlu- ditl'er- 
Micc in cost is niiich liinlicr than that. At oiu- time the 
li.iiiks were chai'^inji' - !><■ I'f^'nt a nioiith in Dawson 
( il\ : ;uid cvtn at that, money was. i'elatl\ eiy, the chea])- 

I ^t coiiimoihty there. Ol" coiirsi- this is an extrt-me case; 
il the ^'ciieral pl'iliciple holds true. The cost of sei'\ - 

is ninch liiLi'lier in the West, and thi' risk is <>'reater. 
l,(adin,n hankers ha\i' insisted that if the statutory rate 
<<\' 7 p<'i' ct'nt wvvv enforced many of the hraiich hanks 
udiiM ha\'.' to he closed. 

Mort<^-a^c and loan companies recei\e 8 oi- per cent 
"II thiir fiiiKJs; and the cost ol' cxecntiim' the inort"'a<''e 
''! iiius the loan up to 1 1 - or 2 per ctiil hinher. .\!4'i-ee- 
iiK nts for sal( yield as hiuli as If. per cent and moi'c 

>ii the money iiixcsted. Impliiiient dealer^ ehai'yc 1 •_' 
|ii r cent on tlii'ir customers" notes, and these ai'e made 

III at credit p'-ici's. .Moreo\ ci'. there are not onl\- vearl\- 
i'lil s( asonal !hietuations of interest i-ates in the W'e^l. 
W li< n thesi' facts ai'c considci-ed it does not appear that 
'lu haiik^ are charuin^i (,\eissi\c I'ates. The crux of 
'!• (iiieslioii. therefore, is this: |^ it to the ad\aii!aLi'e 
I I Ihe West to lia\e money at ])re\ ailing' I'ates rathei- 

II 111 run the risk of decrea^inu' the sn|)pl\ of capital h\- 
.'ihitrarily lixiny- the rate of interest' It would not In- 
praeticahle or just to impose a fixed ?-ate nf 7 per cent 

II till' hanks without rcslrictiiiLt also the rate charwfd 
hy otiur tinaJicial institutions. An i normous amoimt ol" 
'ipital has come into Canada m recent viars from (ii'cat 
Mritain. Holland. I'ranee and oIIki- l-'nrnpi.'in enuii- 
trii's. A tixi'd 7 p'l' ceiil inlii(^l lali- would neccssaiaU' 
■ iU'ect this flow of ea|>ital. and I'cdiicc its \oliime. The 


Mo^■l;^■ and banking 

legislation would (k'l'eat its own (.'nds; foiiipctition woiiM 
be (limiiiislied. and as a natui'al rrsult interest i'at< - 
would rise liiglier than ever. Tlie situation will gvml- 
iially riulit itself as the c<junti'y is develo])etl. and local 
savings heeoine a\ ailal)le. 

5li7. Haul's of siiuiU aipitdl. — It has been ad\-oeate(l 
in some (inai'ters in Canada that l)aid<s of small capital. 
relati\el\' local in their (i])<.-rati()ns, would reduce the in- 
terest rate and |)ro\ ide sutHcient accommodation t'l r 
local purposes. 'I'he W'eyhui'n Security liaiik. of \\\v- 
burn. Sask.. has been cited as an example. This b'aiik 
Avas started in January. IDll : has an authorized eai)ital 
ot'$l.()()0.t)()(), of which S(j;{i. ()(»(» is subseribeil and s;ji.-,.- 
(500 paid u|). There are seven dii'cctors. fi\e living in 
Canada and t\\o in the I'l ' States, 'i'he institution 
Mas started by six wealth; .1. icricans who held larqc 
business holdings in the W'eybui'n district, and who iVlt 
ihe lack of bardsing capital. Mr. llarxey Powell, tlu- 
general managei". has h: d wide expi'rieiiee in l)anking in 
Wisconsin and Dakota. The baid< has paid .5 ])er cent 
on its stock and ear'i'ied ><t!,).()0() l(; sui'plus. There are 
ten branches of the baidv at various small towns in tiic 
j)ro\ ince. 

'I'he bank di\ id(s its business, .so far as interest rates 
ai'c coneii'ni-d. accordnig to the class of customers: tint 
is, not aceordnig to the business he is in. but according 
to his relation^ willi the bank. Some loans are granted 
at 7 |)er eiiit. but the ma|ority are made at 8 per cent. 
The borrow! i- who gets his money at 8 per cent must be 
a depositor, and he must, moreoxer, give evidence of 
being a fiisl-ilass customer in tin- future. A boiiowcr 
\vh(i iji 11 -. riiit ilf-twisit ill ;!!!\' ''xteut !s ebarjjt'd !(.' !!•!' 
cent. 'Ihe man who eami(>i pay his aceomil when din' 
is charged fJ per c( iit for i'iiu\\al. 'I'he baid\ "ttempt^ 

S.S ^-* 



to keep its loans liciuid: it does not want to go into ])art- 
iRTsliip '«'. itii the borrower in a rural distriet. 

The evidenee given hy the general manager ot this 
hank has gone to show that the rates are in general less, 
under similar eoiiditi()ns. than they are in the Tnited 
States. He agreed witii Mr. Forgan. president ot the 
1 irsl National Uank ot Chicago, that the hranch hank- 
iim system can o])eratc more eeijiiomieally and turnijli 
hanking facilities more cheaply, as a general rule, than 
the independent, local bank. The small bank ot limited 
lajiitalization could not compete with the large bianch 
hanks. Mr. Powell, from his American experience, saw 
iiiit one adxantage in I'avor of th« local bank. The 
<lirectors of a local bank may be more dee|)l\ interested 
in thf community than a branch bank manager. Aside 
from that, whether with reference to interest ratis or 
u<ti<ral banking fa( .lities. the large branch banks aie 
in a much better position to si'rve the public. A small 
Ideal bank must deptiid for its success upon the pros- 
perilv (if the locality in which il is situated. If for any 
reason local industry shoidd iei-ei\'' a setback, the bank, 
too. is bound to suffer. This occurred when the wooden 
shipbuilding industry of Nova Si'otia declined at the 
advent <-i' steel ships. The small local baid<s suffered 
liea\il\-. .tiid \Mre obht^ed to i lose ♦heir doors. On tlie 
other hand, a branch bank may be closetl. if necessary, 
v. ithout check t" the institution as a whole. This has 
been illustrated time and time again in Cana<Iian bank- 
ing, especially in the West. 

,").iH. Iiili, oil (hpunits. — Cansidera!>!e dissatisfac- 
ti(.n has arisen among Canadian depositors because the 
banks do not pay greater interest on deposits. The 
ordinar\ rate on deposits is :} per cent, although the 
W. vburn Stcuritv liank pays t per cent. This rate 





c'onipiircs t'a\()r;il)ly v.itli that of hanks .similarly situalid 
in the I'nitcd States. The C'hiea^o hanks, for exani])li, 
pay '2 per eent on daily halanees of eonnti'v hanks left 
with them. They do not |)ay interest, as a rnle. to a cns- 
tomer who makes arrangements to he a horrowinn 
customer: hnt if they ha\e a lar^e account where the cus- 
tomer does not want to l)oi'ro\\'. and wheiv he is essen- 
tially a depositoi', they de(hiet a sum which must he in- 
terest-free and which w ill meet the expenses ol' carryinu 
the account. j)ayini4' - pt'r cent on the halance. Of course 
in active centers as much as 1- ])er cent is paid on deposits, 
principally iiy trust companies. A national hank undei- 
normal conditions cannot pay more than .'J ])er eent. 
although in some oi' the Western States 4 ))er cent is 

()wiii<r to keen com])etition hi Canada, hanks ])ermit 
checks to he drawn against sa\ iu<4s accounts. Moreover, 
very small sums ai'c cai-ricd as curivnt accounts, for the reason. On these accounts the hanks actually lose 
money: hut they ai'c not disciiminatcd a<>ainst, so ^reat 
is the comjKtition to sei-urt' additional i)usiness. There 
is no olliei' coimtry in tin world wlier< service of this 
kind is pro\ ided to such a deni'ce foi- noihin^". Persons 
kce|)in;^' an account of lifty or sixty dollars arc j)ro- 
\ ided with a check hook and complete hankin*:!,' I'acilities. 
The cost of tliis s( r\ ice is ahont .'{ cents ])er check in 
the castci'n ollices and .'{' o cents to .1 cents in the West. 
according as tlu cheek is drawn uixtn a citv or countrv 

It is iiue tlial in Ih' Ivisl. es|)eeially in ilu' maritime 
pi'o\ inces. tin deposits exceed the loans, .-iiid the surplu<« 
is sent to other pai'ts of the Dominion where there is 
an active demand for capital. It has e\cn hten suj^- 
gcsted that the deposits of a |ii<i\iiice should he em- 


ployed there in l)iiil(lin<i' up local iiidiisti-ies. To this 
the hanks reply that they ha\e always met every de- 
iiiaiid made upon them. They eannot take the initia- 
tive: tlie j)eo])le must (h) that for themselves. From 
\\liat has been said. too. it aj)pears that .*J ])er eent is a 
fair retin-n upon deposits in the Kast. There loans are 
made at .> or (i j)er eent. which affords the bank merely 
;i fair retui'ii u])on the cost ol' the sei-\ ice rendered. 

y.iU. FiiKiiiciiii:; tJic crops.- The obvious i)eculiarity 
of agriculture is that, o\vin<>- to tlie charactci- of the 
Canadian chmate. but one crop per annum of a ^iven 
kind is harvested. The si<i'niticant rehition of the farmer, 
tiierefore. to the bankin<i' system ai'ises out of the fact 
that the hainestin^ of the rei>idar staple crops of the 
(ountry such as wheat, oats. flax, barley and others, is a 
siasonal operation. 'I'his is the one im|)ortant fact wliieh 
distinj^uishes the tinancino- of ajj,iicultui'al operations 
iVom that of manut'aeturini^- and commerce. In regions 
which are mainly agricidtural. the seasons of the year 
\\hcn the products of the soil arc bein<4' marketed, are 
the seasons when large calls are made upon the banks 
for loans. 

'i'here are few lines of industry where anythin<i; like 
the same seasonal ebb and How of trade is found. Some 
classes of manufactures, to be sure, are to some extent 
dependent upon climatic conditions ujxtn the s})rinj4 
■iv the fall trade, l''or example, the gcneial retail trade 
ex])eriences sharj) upward moxcments in demand when 
the seasons are changin<.j, and a correspondinjj,' de|)res- 
Mon at the height of the season, iiut bi'ueatii all these 
lluctuations thci'c is a steady current of e\clianges wl ieh 
ni.iiv' 1)0 counteil iiiK)!! f hroiiirhout the \'ear. 

As has already been explained, tlie Canadian farmer. 
especially in the West, needs money not only to pay his 




harvest hands, the expenses of thi'esliing, etc., but \ 
pay accounts due to tlie merchant and the iniplenienl 
ilealer. These accounts are generally small in the indi- 
vidual case, but in the aggregate they amount to an 
enormous sum. The farmer, too. has often secured an 
advance from the bank to meet his temporary needs, 
merely on the strength of his pei'sonal character and 
credit. 'I'o discharge these obligations lie must depend 
upon the salt' of his crops. It is thi'ough tlie banks that 
money is fui-nislied to the ])r()ilucers and the niiddlo 
men. while the j)roducts of the farm are on their way 
to the customer. A heavy burden rests upon the char- 
tered banks during this j:)eriod. and their note issues are 
stretched to the utmost limit. 

During this time, when linancial facilities are strained 
to the utmost, lielj) from any good (juarter is acceptable. 
During itcent years financial arrangements have been 
entered into bttween Canadian and British banks, to 
assist in the movement of grain. London bankers have 
found it such a satisfactory luid remunerative business 
that they are ordy too glad to guararitec advances, if 
necessary, to a larger measure than before. The secu- 
rity is iMideniably sound; and London bankers have been 
enabled in many cases to earn substantial connnissions 
merely by a guarantee, without the actual emission of 

540. Moling- the tccsfcru xclifat crop.— The new pro- 
visions of the act. whieh permit the baid<s to issue addi- 
tional notes on legal-tender money held in the central 
gold reserves, will materially atfeet th.e methods of the 
banks in providing curiency for moving tlie crops. It 

II Iw. 

-wl f!,..t +1,., 


,1 T»., 

deposited with the trustees in Montreal, upon which 
additional note issues are based, will not be available as 



;i |);irt of a l)ank"s reserves. Altli()u<iii tliis is'^ue is not 
Mil»j('et to a tax. some hanks will undoubtedly preter to 
issue additional eurreney on tiieir eajiital and surplus, 
upon wliieli they must pay a tax not to exeeed .3 ])er 
cent. It will he recalled tliat the tcjtal amount of this 
einergencv issue is fixed at 1.) per cent of a hank's eom- 
hined paid-uj) capital ami surjjlus. The hanks tliat are 
.inxious ahout their reserves will undoubtedly i)rcfer to 
j)ay tlie 4 per cent tax rather than deplete their lujld- 
inus of u'old and Dominion notes. The amount of addi- 
tional currency needed at the crop-moving period is 
about >i<'J(). 000.000. Part of this has been furnished in 
Dominion $4 and «.3 notes: l)ut it is altogether likely 
that, for the future, the banks ^vill pirfer to issue (july 
their own notes, as these can now. through the gold 
i(ser\es. be |)rocure(l as easily as Dominion notes. 

Fresh supplies of notes are prepared by the banks 
Hi the summer, and an estimate made of the amount 
reciuired at the different branch oltices. (H-ain-buying 
firms arrange a line of credit at the banks, and at the 
time of del'xcry of the giain at their elevators, secure 
notes from the bank to make the re(iuired payments 
to the farmers. 

x\s the grain is bought it is j)ut tlirougli the eleva- 
tors and loaded on cars for Koi t William. I'ort Arthur 
oi' Duluth. the terminal points on Lake Superi(jr, When 
tjie grain is loaded on the cars the grain-buyer receives 
from the station agent a l)ill of lading for a number of 
busiiels the ca|)acity of the cai'. 'I'he gi-ain-ljuyer turns 
these bills over to the hank as security for loans made 
to him. The bank loan grows steadily; each (hiy luw 

re receivcvi :d 

.. lv...,,,,.l. ), 


^iippiics oi iii''ier> ; 

issued to the grain-buyers. During this time the grain 
is on its way to the lake pints. From time to time the 




MOM ^ AM) H.\\KI\(, 

1 > 

hi- ■ 


\niyvy .^rlls to Winiiiprn- exporters, or lo tlie hiu' „,illi„n 
companies. He draws a .IraTt upon tlie exporter or tlie 
luillino- eoin|)any, to wliieli hills of ladiiiu' -'ire attaelied 

I'V Ins hank. 'Die hank applies the ai nt of the draft 

f" the loan made to the ,uraind)nyer: and instrncts its 
'"■-•I'lch at W'innipe.u'. to which the draft is forwarded, 
to (icHver the hills of ladin.u and insnranee receipts to 
the e\|)orter or miller, as the ease m.ay he. onlv on pay- 
ment iA' the draft. As deliveries .if urain "from the 
farmers cease, the (k-mand tor the haid^'s notes slackens: 
and t!ie -rain dealer's indehtalness falls. 1 f a firm does 
not ncl out its oiviin htt'oiv navigation closes on the lakes. 
It may stori' it in its elevators, prelerrino to keep it until 
the sprino- rather than ship it to Portland or St. John 
l»y the all-rail route. In that case the hanks may carry 
iiic dealer all throunh the winter. In addition" to th"e 
'•ountry huyers the aueuts of the Winm-pe-- exporters 
antl of the hio' millers will he huyino' from the farmers. 
This husiness is financed in the same way as that of the 
small oTaiu firms, hut at \\'innij)eo' hanks. 

Jn W'innipeo' and other cities the l)io' exi)ortino. firms 
send out lar-e amounts of cash to the centers at'^whieh 
they havi' elevators. They also acce|)t the drafts drawn 
iipoM them hy country deak'r>: so that their indehtediiess 
to the hanks is constantly increasino-. 'rh^ security for 
these haidv loans consists largely of wjieat in store at lake 
ports. Jiy sales and shipments fiom lliese points their 
accounis at the hanks are li(|uidated. W'iien a hoat- 
l'>.i<l ')f ,urain sails fiom an upper lake port for HulValo 
and New N'ork. or ilirou-li the Weiiand Canal for 
-Montreal, the haul, hnys the sterlin-' hill of exchanoe 
with the hills of ladinu' attached Iherrto.. '\'\u> I.,!..,, hTu 
of ladinn- is. of course, ixclianovd for an ocean hill of 
•'"•'"f^' ''^ *li^' l'<'i"t <••' ^Iiipment. When the sterlin- 

(•A\.\1)I.\N HANKINC; 1'H()15M;.MS 


liill i)[' I'xcliaiiu'c is drawn, with in ocean l)ill of lading 
,111(1 insnraiift' receipt attaclied. the l>ill is iisually sold 
ill .W'w ^'(M■k. Thus the hank and the exporter hoth 
lia\e theii' money. 

The hank notes u'radually i-etnrn to the hanks as 
the farnieivs and the merchants settle tlieii' acconnts. ^Vn 
(Mormons credit hnsiiuss is cairied on in Canada. esj)e- 
eially in the West. When these accounts are settled the 
notes, as has heen said, gradually return to the ))anks 
eitliei- to he deposited or to pay ofli' loans to the hanks. 
'I'lie notes thus I'orm an elastic medium of exchanu'e. 
expanding' and contractiiif^ as the need re(]uires. They 
cMst tlu' hanks \ei'y little, aside from the expense of 
piintin,!^' them, exeipt in the cast' of the tax on the 
u!ieo\ fi'ed enR'r<4enev circulation. That tax is not paid 
until the notes are actually placed in cii-culation : hence, 
they may he held as till money at a trivial expense. 
'I'his is an ad\anta^e not generally recofrnized: hut it 
results in \ery lar^e savings to the l)ank. 

.")41. C'onninrcidI letters of credit in CaiimJn. — \\Miile 
the })anks ])lay a \ery imj)ortant pai't in the way just 
descrihed in the export trade, they play an ecpially im- 
|)oi'tant I'ole in aiding manufactureivs and wholesalers to 
lii'ing goods into Canada. Indeed, one of the most im- 
poi'tant functions of the hanks is to facilitate the impor- 
tation of merehan<lise into the country. 

When a Canadian merchant or manufacturer wishes 
to import goods from ahroad, he may settle for his pur- 
chase hv any one of the three following methods: 

( I ) He may s(,nd the expoi'ter a draft on a Loudon 
I)ank, in payment for the goods, along with the order. 
This in\(il\cs risk in regard to the (juality of the goods, 
as well as loss of interest on the amount !)ai(l for them, 
lience. tlii< method is seldom followed. 





M0\1■.^ AM) H ASKING 

(2) Wlieo sfrHiiii^' liis onler lie may instruct the ex- 
porter to draw on liim in payment, eitlier at sight oi 
alicr notice. accoivHtiu to whatever teiins have hecn 
agreed upon. 'I'o such a rli-alt (ioeuments ( hill oi' l-idinu-. 
insurance i-tciipt. etc.) u ill W- attached to he (kli\tred 
to the Canadian importi r upon acce|>tanee of the draft. 

As the first iiK-thod might iinolve loss to the C'a- 
nadian importei-. so iniujit the secoifd to the Knglish 
exportir. It' the Canadian customer wvvi- unknown to 
the exporter the ordei' would, no (h)uht. he deelinefj: be- 
cause, if his (haft were rtfused. he would he compelled 
to .NKM-ifiet- his goods at foiv id sale in a strange country. 
Credit relations of this sort are usually arranged in ad- 

But even if the Canadian .should he a highly trusftd 
customer, the exj)orter in Spain. Italy, (ireece or (.er- 
many would have to i>ay an exceptionally hi ' rate if 
he wished to discount his draft on a Canadian I, 
same holds true to a less extent for the Knglish expoi , 
This would, of course, all'c-et the ])riee the exporter could 
<|Uote. to the dis.uh ntagc (>f the CanadiaTi merchant. 

(3) The most .satisfactory method to all concerned, 
as Avell as the one most usually employed, is the use of 
the commercial letter of credit. When a merchant or 
nianufacturei' wishes to impoi-t any considerable quan- 
tity of goods he applies to his bank for a commercial 
letter of eredit. 

In the ;ii)plication to the bank, he gives full j)articu~ 
lars with regard to the name and address of the exyiorter. 
the terms of the draft to l»e drasv ti in pavment. date be- 
fore which the goods must be shipped and their destina- 
tion, total amount which may be drawn, also whether 
the goods are insured liy the exporter, or in Canada bv 
the importer. Then, when the ai)]ilication is granted bv 




ill.- liMiik. \\\v customer receives a letter of eredil wliuli 
I, t'oi-wanled with his order. 

'I'liis letter of credit iiiithorizes tlie exporter to d'-aw 
.,11 the London aoviits of the hank or its an;eiits in any 
othv'r eitv. np to. hut not exceeding, a certain amount of 
pounds sterling. Such a draft must he aceompani((i 
hv a certified invoice and hill of lading made ou^ to the 
Older of the hank, for goods siiipped to the Canadian 
ciistonier, according to the terms of the letter of credit. 

\V1 en the e\i)orter ships the goods he draws on the 
London bank: and j)resents the draft with the relative 

tcunients attached, together Mith his letter of credit, 
his own l)ank. The hank will at once discount the 
hill, and the exjjorter thus receives his money even before 
the goods mav have left the coimtrv. 

As London is the clearing center for Kuro])e, docu- 
iiientary bills of exchange are discounted at a very low 
rate of interest. IJoth the exjiorter and the importer 
gain by this ])rocedure: the former receiving his money 
without risk of loss, and the latter getting a better price 
ijuoted on the goods lie buys. 

i'h.e Cannd'i-n bank has. in the meantime, forwarded 
to its London branch an exact copy of the letter of 
(ledit; so that when the branch bank has presented i • 
it the draft, with the necessary documents attached, it 
at once accepts it. The documents are then forwarded 
to the Canadian branch which granted the credit, to- 
ffetlicr with advice of the date and amount of the draft 
which has been drawn against tlie credit. The Ca- 
nadian customer is then notified that the bank liold^ 
the bill of lading, etc.. and that he may receive these 
bv meetiniT the amount due upon the draft. If the 
draft drawn by the exporter i- t sight, the equivalent 
('\' the amount will be charged .n once against the cus- 




tomci-'s ac't'oiiiit. The (locuiiiciits .U'iving title to tlio 
goods will tl'en he turned over to him. But if the 
draft should not mature for some time, the customer must 
execute a trust receipt hefore he can gain possession of 
the merchandise. In tliis receipt he ])le(lgcs himself to 
hold the goods in trust, as the j)roperty of the bank, until 
the (h-aft is ])aid. In this way the letter of credit })lays 
a veiy inii)ortant jiart in the carrying on of the country's 
ini|)oi't trade. 

.■>l'-'. ('(iit<i(li(ui clearing houses. — The Canadian clear- 
ing methods arc carrit'd on partly hy means of credit and 
partly hy cash si'ttlemcnts. Three systems are followed: 

( I ) At the lai-ger centers are clearing houses of the 
ordinary t\ pc. wluic the balances arc settk'd in cash. 
As a matter of con\cnience tlie banks use for this pur- 
pose Doininioii Icgal-ttiidcr notes of lar'ge denomina- 
timi. which ••irc issui'd e\|)rcs,sly for .'is j)urpose. 

(2) At some cities of the -• ond lank tiu'i-c arc clear- 
ing houses of the ordinary j,c: but the resulting bal- 
ances ai'c settled by checks di'awri ori central i-ities. 

(.*{) At the i'cmainin}4' ofliees which, of course, cover 
the bulk of the branch ofliees. exchanges are made di- 
rectly bitwccn the baid<s. aiu. the resulting balances 
settled by draft on the nearest local tinanc-ial center. 
Tliroughoiil Ontario and '^ucIm c x I tlcnient checks are 
dr.iwn ( . Toronto or Montreal; in the maritime pi'o\ - 
inccs on Halifax or .St. .John; in the |»rairie provinces 
upon Winnipeg: and in liritish Coliiiubia on \'ictoria 
and \ aneoin ( I'. 

It should 1h obxrvcd that llic Canadian clearing 
houses have di'.elopcd no special functions such as the 
.\merican clearing houses ha\c done. In the I 'nited 
States, jis is ' known, the functions ( t' the i-karing 
lu)iises lia\e .n.lcd 'ar bcvond ilu ir orininal \\u\\\-: 



until tlu; clearing' houses to-day arc ccntcis tor united ae'- 
tion anion<^ the hanks. 'I'liey re<4ulate all (juestions 
atf'ccting their mutual welfare, sucli as unii'orni rates of 
interest and exchange, as well as otjier (|uestii)ns mT 
gi-eater iin})<)rtance to then.. It is hy united action that 
the hanks have, in the past, heeii ahle to succcssl'ullv meet 
a crisis hy the issue of clearing-house certificates. In 
C'an.ida, on the other hand, all matters of imjjortance are 
settled eithei- hy the e\ecuti\es of the different hanks or 
liy tlie Hankers' iVssociation. the clearing house ])laying 
no part whatever in such matters. 

In London tlu' clearing-house system is very much 
the same as in Canada. ( \ce])t that no cash is lieared 
owing to the fact that tlie Bank of Kngland has a mo- 
nopoly of tiote circulation withiti the city. Balances are 
|)aid hy check on ilie Bank of Kngland. with whom all 
tlie other hanks keep accounts. In the l''i:ghVh |)ro\- 
inces. as well as in Scotland and Ireland, the clearing 
house.', are conducted along almost the same hue as in 


\ i 

C_VII— 31 




5i.'J. (rovrrninciit note i.ssiics. — The ])a|KT money of 
Canada eoiisists ol' government notes and hank notes. 
The t'oi-mer are a full legal tender; hnt the hank 
notes are iinested with no legal (|uality whatever, nn- 
less the ohiigation resting npon the hanks to accept 
their own notes on presentation may Ik' considered such. 
The amount of Dominion notes outstanding has in- 
creased rapidly in recent years. In 1!M)() the total was 
only !i<2(;.:).-)().4(;.'}: in lOia (April .'{Oth) the amount 
Avas $1 K}.T4(),7.'{.'{. These notes are of the following de- 
nominations (exclusive of $"J7.7S.5 of former provincial 
issues not ledeemed, and fractional notes at .'25 cents 
each. $7<!.'J..j3«) : 


$1 ^l^.-Sp^.S^f) 

2 <>,i;i7,i.'8<) 

4 ns.uf) 

5 .I.TO.^.'.'.'i'J 

.'50 1 5. .'{()() 

H)() 7/200 

■"'(>() . 2,07 i.OdO 

i.<»(i() 5,sn,ooo 

.'500 IrfT.iM' lult r iiotrs fnr li.iiiks .'fHri.OOO 

1.000 lcjr,il-t( lulcr nods fur Ivitiks '2,08i,l)()l) 

5,000 lrgal-t( ndiT i\oUs for limits 7.5,7 ^.5,000 

It will f)e recalled that upon the lirst !i<;}(),(M)().(M)() 
issued the g(>\(rnin(rit is ohligcd ti) rnaititain a 2.") |)cr 

_ I _ _ : ,,_, i' !,! ,,_,,! „!i: _, , i . ! 

i-'i-iii It .Svr\'t" liiiitie 'ip i-i giHii <iri(i St'i'i i i il i(~S gi in 1 ilTlTl ( »' i 

by the United Kingdom; hut at least 15 [kv cent must 




lie ill «T)1(1. As a iiiattir of fact, the governineiit iiiaiii- 
..Mis tlic whole of this reserve, .$7. •>()(). ()()(). in o()l(l. 
Notes ;ih()ve «.'J().()()().()()() are issued only on a ^old hasis. 
The specie held on Ai)ril .'}(), i;n;3, to fnlHU this ohliga- 
tion anionnted to .$«;j,74(),7.'j:j. It will he seen, there- 
fore, that the Dominion notes are, in reality, gold cer- 
tificates. The act is jjlainly inodell'd upon Peel's Act 
(if 1814, which perniitted the Haiik of En-^'land to issue 
notes up to a certain amount on securities, and heyond 
that ])ound foi- jxiund on uold. 

The hanks are ri(|uire(l hy the government, under the 
Urms of their chart rs. to kiep 4() ])er cent of such re- 
serves as they determine to hold, in Dominion notes. 
'I'he hanks i)uy these Dominion notes with gold. From 
the goverinnent statement it may he seen that on April 
.'{(), im;}. the hanks held ahout .S7S.()()().()()() in large legal- 
!i ikUi- notes, which are used in jiai't U^^ reserves and in 
p.irt for cl(;ning-house purposes. Ai.. .', >< I. "),()()().()()() 
of the rest of the Dominion notes i- used hy the hanks 
as till money, Iea\ ing oidy .S-J(),()()(),0(K) in the hands of 
tlie pe()j)le. 

As has Ikcu shown, against uie paper moncv of the 
Dominion the vaults at Ottawa contain somewhat more 
than $!»1.(M)(».(K)() in gold. Many linancial critics have 
iiiiiintaincd that this is an excessive reserve, and an utter 
\\;istc of a great amount of capital that oug'it to he out 

the world doing husincss. It is said that conditions 

II n( \(r ai-isc in Canada, sjiort of its con(|ucst hy a 
i.ireign foe, in whicii government notes to the extent 
nf over SI(M>,()(M»,(M)0 vvouhl l)c presented at the receiver- 
U( neral's oMicc with a demand for gold. The critics of 

■ :,v pit"".; I'il j;;:iii y ili.'i liitiiiii liiiir iiii iiSt V\i i.,u K ui iiic 

Dominion notes might he placed at .50 per cent of the 
i^-sue, instead uf practically dollar fur dollaj- in gold. 











This would reduce the amount of idle /'old l)y $-il, ()()().- 
000, uiulei' present fotulitions. It' the \a\v recjuirin^ the 
banks to keep M) eeiit of their reserves in that case 
remained as it is, ihe gold lield against tiie large legal 
tenders in possession of the bunks would l)e redneed fiom 
$7H.()()0,0()() to .^.*{9.()()0,00(;. The further suggestion is 
that the ."^.'{D.OOO.OOO in gold ^hould he used to reduce 
the national debt or s])ent by the government on na- 
tional works. In this way the national ))urse would gain 
j;t least i^l .'JoO.OOO a year in interest, and the banks 
A\()uld still be amply secured against any eoneeivable 
(!< maud foi' gold. 

Xow, the chai-tered baidxs held on May '.M. 101.*), in 
round numbers, .S-1.(),()()0.00() in spirie and $J):},0<)(),()()0 
in Dominion notes. If they held inci'ely !■(> \)vr ci-nt of 
their cash reseini's in Dominion notes, it would amount 
to .$.5;},0(»0.(I0() only. As a matter of fact, however, 
they keep siune SK». 000.000 of Dominion notes in tin ii- 
reser\es more than the law re(|m'res. 'I'his they do be- 
cause of the ease with wliicb legal tend<'rs can be .sent 
to the dill' I'eiit bi'anch b;inks foi- use in their reserves. 
That tluy would contimie tn d'> so i!' the law were 
changed in the maimer descrilxd is more than doubtfuL 
If Ihey reduced theii' holdings of legal tenders to the 
amount that the law prescribes, that is, to !t^.")."{.000.- 
000. the government would gain in intei'cst only on ;iii 
i.s.sue of about •'^•JT. 000. 000. ;ts far as the large legal ten- 
ders ai-e eonc( rued. That would be a paltry gain in 
icinrn for tluenh ninn the gold reserves of Ibis eoimlry. 
already tno srn;dl. .\nd despite what has been said by 

those in f;i\ or of the plan, the n( w order of things would 
I i.i«^ .. . .... — 

MOl HiUKt. iiii i/Oniiiiiuii iioits ;in ^^(loii ;|s i4oi(i. f\ 1 1 

doubt in normal times llu \ would continue to ciriulati' 
at ])ar. as long as tlity were payable on demand in gold. 

TIIK HANKS AM) Till" (iON l.HNMr.N'l" 


and as 1imi,!4 as tlit jjeopk' deinaiKkd lliciii as a im-diuiii 
1)1' (.-xchangt* and Hie hunks conliniK-d to use theni in • 
tlnii- ivsLTves. Hut if the <i,o\ criimmt sci/ed the oppor- 
iiitiity to make further jjrofits l»y extending- the issue of 
I he sniaUer cK-noniinations. the time rnij^iit easily come 
whiii a iiation-\vi(k' (hsaster would depress their value. 
Aside from the (|uestion as to whether the govern- 
ment should eompete with the hanks in issuin;^' a credit 
iiiireney to the people, there is the serious prohiem of 
niaintainiii<i; an a(le(|uate '^nld reseI■^•e 'u the eountrs. 
The pro\ ision of the law eompelliu^- the hanks to keip 
to per eeiit of their reserves in <^()vernment notes was 
enaeted at a time when the Dominion needed money, 
and souuiit to find room for the eireidaticn of iis notes. 
i"he hanks would strenuously ohjeet to eh;mo-ino- the 
essential eharaeter of the notes at the i)resent time; and 
would prefer to keep thc'ir ow n j^old rather than have the 
4(»\trnment deplete its j^old reserves. It may t ven he 
.|uestioned whether there is suHieieiil ^old in the eoun- 
li\- for the husiness done. The total lial)ilities of the 
•ji ehartered hanks on May li\, I'.M.'k were J<1.--'77,'.>41,- 
.V.>7. .\f^a!nst this the haidss held in k^j^al-tender money 
■^ I ;{.■{, l.'}.*)..'}!"-*. This sum was eomposi'd of nol,! and 
1( oal tender notes piaetieaily «^'o!d. Now. if the u'ov- 
ernment should hold in ^old a reserve of only .")() per 
(■ml a^-ainst these notes, it is plain that the position of 
llie haidxs. as well as of lh<' eountr\ . would l)e wi'aki'iied. 
I )niiiinion notes arcworthless for intrrnational exehan^e. 
althouiih they are a full le^ai tender in ( ;ma<la. It 
would seriously weaken Canada's inlernatittnal posi- 
tion if her present sm.-dl stoek of ^old were seriously 
'i!:ninisln(l. It is (juite eoneeivahle that in certain peri- 
ods foreif^n inxcstments in Canada will fail off: and 
Canadian seeurities might he sold in large (plant it us hy 




K ■: 

iorc'i^ii holders. Tliis. addi'd to heavy imports, vrould 
seriously allVet the rale of exchange: and a small stoek 
of gold would not re<4ulate thi' situation. It is jjerfeetiv 
clear, therefore, that the ,^•overnnlen^ would he ill-advised 
to threaten the supply of oold l,y e.\iK'rimentin<^- with 
the Dominion note issues. 

.")44. Td.vini:; llu Jxaih's. — Some Canadians have eom- 
])lain(d that the hanks are given special favors hv the 
government, for which they |)ay nothing hy way of uix- 
ation to th country. One man. for example, who 
appeared hefore the C'ouimittee on Haid<ing and C'om- 
meree in April. 1;>1.'{. said: "'rhe hanks have been given 
a monopoly oi' the haidsing husines- of the country. In 
addition they aiv j)ermitti(l to issue currene\ to the 
extent of their paid-up capital at no greater cost than 
that of the engraving and ])rinting. This amounts to a 
virtual gift from the government of ^100. ()()().()()(). 'I'his 
currency is not suhject to a tax of any kind, and instead 
of iieitig secured hy gold nr goxernnicnt bonds il^ is se- 
cured hy heing made the preferred creditor against tlu' 
assets of the })ank."" This statenuiil is txpical of many 
similar criticisms. It is hardly neees^^ary to draw atten- 
tion to the fallacy that tin- government conlrihutes -SlOO,- 
OOO.OOO to the hanks, hy permitting them to increase 
their lialiihties to that amount, lint the (luestioti of tax- 
ation, which comes up again and again in (':!nada. de- 
serves some considci'ation. 

It is true that the lederal goNcrnment dot's not tax 
the hanks: iml llicy paid in the se\ti-al provinces in 
li»]'_' ahiMit .SnT.ii'H) h\ \Ka\ of taxation. This takes 
no account of local ta\(s on red tstatc and special 
licenses and fees in certain citiis. I"or ( \ample. Halifax 
charges each l>ank $1.(100 yearly and I If. of 1 |)er cent 
U[)on i!i<' axerage \iilimie of husincs> done . including ;dl 

4-' r 



loans or investments and current and savin(?s deposits. 
The niininiuni so jiayable is $7.'}(); but a bank may eom- 
nuite for its I'ees and taxes by paying $;J.()()0 yearly. In 
St. John. X. IJ., a munieipal tax of 1/12 of 1 i)er cent 
is imposed upon the average vohime of business done. 
as in Ilahfax, X. S. In .Montreal a s])eeial license of 
S(i()() is exacted from each head oflice and if^lOO from 
each branch. In Quebec C'i^v the mumcipal license is 
SI, ()()() with $2()() for each branch. Montreal also im- 
poses a tax of 7' 2 ])er cent on the rental value of the 
hank premises, aiid Quebec a similar tax of fJl- per 
(■(lit. These taxes are in addition to the real-estate taxes. 
Ill Ontario the law ])rovides that banks shall be assessed 
lor a sum etjual to 7-) i)er cent of the assessed value of 
the real estate occupied. On this sum the local rate of 
taxation is levied. This is. of course, in addition to the 
local tax on real estate. This tax does not amount to 
as much as might appear; for the assessment of real 
(State in Ontario municipalities is much below the mar- 
ket value. The banks in Toronto, therefore, do not i)ay 
nearly as heavy a tax for local purposes as those in 

Talking the i)oi)ulation as given in the 1011 census, the 
number of inhabitants i)er bank for these five cities is as 

' fi 


Toronto .'i7(i.'2K) 

Montreal l()(l,l!)7 

(^i.'Ih'c TH.'XiT 

Halifax «■(;.(;() 1 

.St. John i'.'.i!);) 

NmiilitT (if I'tr- 

Bank Offices suns to 15 ink 

U.-i 2,.)!>t 

!)7 4,806 

'.H\ .'<,()() -2 

!',> 3,88-2 

IH 2,656 


IS ;tvo 

!)• Die that the lieaiv taxc 

in ^Montreal have 

ha<l somethi ig 

to do in bringing about this result. It is 



L « . 

char thai when a miiiiicipahty levies heavy taxes it is not 
l)r<)\ ided with the same haiikiiin- faeihties whieh it other- 
wise would .secure. The hanks naturally, whenever jjos- 
sihle. transfer tliese taxes to horrowers, especially upon 
customers not of the first class. In some form or other 
they endeavor to earn these ta vcs; and it is only fair 
to j)ut these on the locality where they are levied." 

The proj)osal which lias found most favor in the tax- 
ation of the chartered hanks i)y the federal government, 
is to levy a tax on circulation. At one time the hanks 
did j)ay a tax on circulation; hut in 1870. when the aov- 
ernment restricted their note issues to $.5 and multiples 
thereof, to make room for Dominion le<)'al tenders, the 
tax was repealed. It was felt that in a new and unde- 
veloped coimlry. such as Canada, the hanks sliouhl not 
he hurdened in furnishiiio' accommodation to the ))eople 
hy a tax on note issues, since in tiie country districts 
notes fiii'in the principal medium of exchan<4'e. That 
reason holds ,o(),),l to-day. .\ny considerai)le tax on cir- 
('ulation. as has already heen pointed out, would un- 
douhtedly ohlioe the hanks to close their hranches in 
the small country districts, especially in the AVest. It 
is scarcely realized to Avhat extent the hanks have pro- 
vided hanking- accommodation to the towns and villages 
of the West. This is seen hy a glance at the following 
tahles, which show the numher of hanks in the cities, 
towns and villages in the four western provinces — Mani- 
toha. Saskatchewan. i\ll)erta and liritish Columhia. 
(In this c'omiection it should he noted that IJritish C"o- 
lumhia's jjopulalion i^ all contained in the cities and 
large electoral districts.) 





'r()\ met' 

No. of 


Allurt;i <i 

ISritisli ( ()liiiiil)i;i .... I'l 

M iiiitob.i t 

2 S i''k;\tclic\v.iii 1 

li.WK oil i( I..-; i\ 11 11. ( nil s 



l'ii{iiil'it ion 



to Hank 





1 I'J 




'J.jl 1 








i'ro\ iiu'O 


Nl.niitoha . . . . 
."^ isk.iti'liewan 

Xo. of Hink l'o])iilitioii 

Towns l'o|iulition OHiecs to Hank 

'27 'J,-).S,S1 r>r) \-~\ 

■2t 'i().!)'2G 47 r,i:i 

51) .'57..")01 97 '587 

<)<).;! I 1 




No. of 
Trovince Villafri s 

Allurta 8-2 

Manitob.a '21 

."^ iskatc'liewaii .... 1!);' 





6a, .')().' 





'2 11 


to Hank 





Tlicse fipfures sliow tliat a tax on note ciirulatioii 
vvdiild foiTi' the banks to many of tlu'lr olFicos in 
ll:c ^Vest. While, no doubt, tlie ])anks have a valuable 
iianeliise in tlie power to issue notes, tliey a|)])ear to 
be giving' a suttieient return in serviee. Xo other l)ank- 
iiio- system in the world ean show a better record in 
briniriiijr banking- faeilitie.s close to the people, especially 

' . il- „ i. ] '. I ..! ^.t .. \ fii-v- i\i\ /■! l*r •! l1 ') f w U I H'Mlll/l 

J i i i I iv." Vwl • I i I ; '» ; ; : ~ ; : ;^ "^ ~; . - - ■--.-- • -: ! 

result merely in im])airinj2: the s<'rviee ol' the banks to 
!lie people: ;uid in the last analysis it would be j)Mssed on. 




ill })art at least, to the eustoniers ol" the I)aiiks. Vvn- 
posals to tax the eii-eiihitioii of the hanks, therefore, are 
ill-timed. W'liat is wanted is not only inoix- hank 
offices as the eonnti'v <^i'o\vs, hnt more money a\ailahle 
for loans in the West. .More eapital is needed for C'a- 
nadian hanks; and that is not likely to he seenred if it 
is tliou<.>ht that the i4r)\crnment intends to restrict hank- 
ing- o])erations thronf^hout the country. 

.54.>. Mont/il// stdtfuicnts to ilic i<;()vcnimcnt. — Under 
the act chartered l)aid<s are ohli^^cd to make a monthly 
statement of their assets and liahilities to the govern- 
ment. In tlic revision of 1 !>!.'} the schedule was modi- 
tied somewhat. {)ro\ iding foi' a moi'e detailed statement 
of a hank's affairs. A well-known ' .k manager has 
expres.sed the o])inion that these returns "are not \vorth 
the paper they ai'c written oit": the reason hcing tliat 
fi'audulent i-eturns from !)anks that ha\e gone into 
li(luidation have heen included in the general statement. 
AN'hile it is true that statements hy such defunct insti- 
tutions as the Ontario Hank, the Sovereign Hank, and 
the Farmers' Hank have heen necessarily included, and 
have thus vitiated the results I'oi- the ])uri)oses of com- 
parison, it yet remains true that, on the whole, the state- 
ments have heen honestly made. At any rate, they 
furnish the only figures, concerning the condition oi' the 
banks, available to the ])uhlic. 

It is not neces.sary to make a detailed analysis of th'' 
resources and liabilities of the chartered banks; but the 
chief items which bear upon the standing of the banks 
may be briefly set fV.rth. In order to make clearer the 
growth of the banking ])ower of Canada, a comi)arisoii 

1907 — a memorable year in Canada as well as in the 
United States— and their jjosition in recent years. 

rili: BANKS AM) Tin: (iOVKRN.MF.N'l' 


I'ii'st. tlif extent of the loans and deposits and their 
n lation to one another may l)e eonsidered. ""Current 
Iduns in Canachi"" rei)re.sent the money loaned within 
theeounlry for eommereial pin'poses, and do not inehide 
the i-all loans whieli are hased on stoeks and lionds. 'I'iie 
il( posits inelude tin dejjosits in Canada (- y. and eon- 
sist of those payahle on demand as well as those pay- 
;i!ile al'ter a fixed date. The sum total of these i'et".rns 
at certain speeitied times was as follows: 

C'lirniit l.o.iiis l)t posits 

May .'31. liH.I $8!)H,II."<S.(H)0 $99 K!) 1 "'.DUO 

l).("tnib<r .'il. 191'^. 881 ..'!.il .001) 1 .01 'J, H 8,000 

Jiii'f ;!(). I9l'j ,si-s.9K).oo() i.ooi-.siT.noo 

June ,')(), 1907 ;")8(),!);i0.000 .TSj), I- jO.OOO 



8 1-% 

This statement illustrates the remarkahle (growth of 
Canadian hanking in reeent years. It indicates, too. 
that the hanks are not so heavily committed in the way 
of loans as they were in li)()7. Perhai)s it would he fair 
to say that the hanks lia\e heen more careful and con- 
s(r\ ative in making their loans, excluding as far as j)os- 
sihle those of a speculative nature. 

A better survey, liowever, of the recent position of 
the hanks may be obtained by finding the ratio which the 
assets that may be (juickly reali/.ed upon l)ear to cur- 
it'iit liabilities. Cash resources consist of specie and 
Dominion notes. For ])urpose.s of comparison the cash 
reserves of the banks on certain selected dates may i)e 
shown as follows: 

1 )(iiMini/in 

\(?tcs . 
Total . 

.May. 191 ;i Die. 191-2 June, 1 91 'i .June. I907 
.tK),;?'2.').()7f) $.S.5.780.3fJ.S ^:i7.\'-2-2.76r) $'2i,H)I.()(l,S 

9;5.io9.(),'i() !)i-..'J8i.i8i- !);i,()i.s.o.'i9 t:..5j t.i8-2 

$13.S,i35,81'2 .$1.'50..S()1.,817 $130.170,80i .t()9.(i.').'i,78r) 

'at;- '- 



In tlic six years siiifc 11»()7. it will be uutcd that tin- 
cash reserves have almost dtxihkd. 

Another inipoftant item in the lianks' (juiek assets is 
the excess of halanees <lue to hanks from as^eneies or 
othei- hanks ontside of Canada above tlie amounts due to 
outside a^a-neies or other hanks. Tliese amounts (000 
omitted) aiv: 

May. 'l.-i 
Balances due fr<ini 

L'liiti'd Kiii^dciiii. . ."fjl ,S.'{5 
lialaiiiTs dill' from 

(■Iscwliirr 27,8'2G 

Total $J.9,66l 

B.ilaiiCfs due I'liilt'd 

Kingdom ■fP.^O,") 

BalaiK'ts due tlsc- 

wliere 9-<)7.'5 

Total $18,880 

Excess balance .... ^0.781 

D.e., l-,' 

June, 12 

June, 'U7 

$1(1.1 1!) 





1 ..771 
















Canachan hanks, as lias l)een explained, maintain at 
all times lar<)e amounts abroad at eall. largely in New 
York. On May .'Jl, 191.'}, this amount .somewhat ex- 
ceeded These loans are (juick assets, and 
ai'e available in Canada when needed. Call loans on 
Canadian stocks and bonds, as already explained, can 
hardly be included in tlie category of assets that may 
be (juickly realized upon, except in normal times when 
they are considered with more justice as call loans. In 
])eriods of stress, however, call loans on Canadian secu- 
rities are regarded bv the banks rather as fixed loans. 

'VU(, Ilov,].' i^f A[.'t! li'!-; 

,;i 1, 

r\.. ..,,!.. 

whatever. So-eallcfl call loans in Canada ^v•ere fairly 
steady in 101.*] around -'i^TO.OOO.OOO. 


Along' with the foreign call loans should he c-()n>i(lcir(l 
current loans mIji-ojuI. These latter are distrihuted 
through the I .lited States. Mexico. C'uha, the ^Vest 
ludies and elsewhere. On the liahilities side must he 
considered the deposits received hy Caiiadian hanks 
ahroad. These several accounts ahroad conipaic as fol- 
lows : 

M,iv, 191 ."^ 

D.ccmkT, lpl'2 
.hiiH". 1<)1'2 . . . . 
.lunc, iy07 

C1II Loans 
.$96.1 -.1, '20!) 




Currrnl Loans 

$3 7. 6<) 1.7 8(5 






It will be seen from this statement that the funds for 
current loans abroad are jirovided from deposits re- 
ceived abroad. On ^Fay .31, lOl.'J, dei)osits received by 
Canadian banks abroad exceeded by .^C.O.OOO.OOO the cur- 
rent loans ahroad. As the foreign call loans aggregated 
over $9(),()00.0()0. it is manifest that some !^;j().()()().()()() 
of the amount loaned abroad on call is Canadian funds. 
But. as has been explained, these call loans form ii 
secondary line of reserves for Canadian banks. 

A fourth item in the list of assets, which may be 
quickly realized upon, is the holdings of railway and 
other bonds and stocks. In so far as these are held 
abroad, they may rightly be considered a cpiic-k asset, 
although when held in Canada their right to he consid- 
ered as such may be open to ({uestion. The holdings of 
Canadian municipal .securities can hai dly be regarded as 
quick assets, under certain conditions, as in 1913. 

Coming to current liabilities of the banks, it is fournl 
that they consist of three items; namely, circulation, de- 
nosiiS and hal'incos du.f- povcrnmcnts. The latter are 
divided into accounts due to the federal and provincial 
governments, respectively. Deposits consist of those 


payable on dcnuin;! -L'posits j).'iyal)le after notice on a 
fixed (lay, and deposits received elsewhere than in Can- 
ada. These various items for the dates considered were 
as follows (000 omitted) : 

Drposits May. 'l.'i I)(t.,'I,> June, '12 Jtinr, •(): 

Oil (irniaiid .. . . !f.S() k 1 ,-.!) $.(7!). 777 .*:i7;!..')00 $170,012 

<'" '|'»ti''' ();i().7:.,-, ():i-j.(in ().'!1..{17 4.0,H7 

'^'"■"■hI J)7.!).i.") S7.n.-,n S'2.0(i7 59,171} 

'•'"'■'J .$1,01)2,81!) .$I,0yf),t()8 *1,08().88 ). ,t6l8,(i.-f.-, 

Amonpr the assets of the Canadian haidvs is carried 
an item made up of "notes of and checks on other 
hanks." which is merely an inter-hank item On tnis 
account it may he deducted from the current liahilities 
of the i)ard<s as a whole. The relation of current assets 
to liahilities may then he compared as follows (000 
omitted) ; 

Qn!</,- .t.ssrl.<! ray. 'l:{ n.T..':2 ,Iunr. M: Jnn.. '07 

( a^^l: r.s.. lines .$1 .'<.'{, t.1.-. ,< 1 JS..;!) |. .i^l.iO.lTO ,'f(i<).«i.-,.-, 

I'accss for. i^r,| halaiicf. .•i(1.7H0 17.'-!(il H).7!):! (I.'CO 

( il! loans aliroail . . . <)(), I "i 1 m.KJCrJ 120. .")()•) .'>.'),2!>8 

Railway bonds vV stoiks (17.021 ()8,8K» ()2,2!)2 H.-SSI 

'■'"••'• if!.'i27..''S7 •*.{20. n 7 .t;?()2,H2 !■ ^'I 7.'f,;io \. 

Ciirrnif f.iiihllitirs: May. ||l|.l D.r., |<)|J .luiif. I!H2 .Iiitic, 'o7 

< iri'iil-itiori •■T'n)2.!l|)7 .*ll(i,(US .-^^102.011 .*7:i.:i 1 1) 

'*'l"'^i'^ I.O!)2.8,-)0 1.0!)<j,Ki8 1.08(i.H8|. (;i(i 

J{ai inrr iliii ■^(i\ - 

"■""""t^ .•<!),7.'50 .'JD.rtl'i .S7.288 l.-J.fjH 

'l""t'>l .i'l,aH5..5;)7 $I.2I!).IJ,S ■*l.22(i.l8.i •+7.if).787 

Less iiolcs of and 
rlirrl<s nti otiicp 
'""'^•^ 6l,.'SRfi 81.68^ ,'57.7,5,'? Q()'\[G 

'lot il .*l.l7i.2ll ij«!.lfJ7.iU >l.l(;s.^.■^o $710,271 

itilin ( [irr (imI ) . 27.8 27. !• ;<1.0 2 1 . ."J 




'riifsc statements cover the eliief returns of the hanks. 
,111(1 showtliat tliev have steadily improved their |)osition 
ii! reeent years, although their husiness has greatly ex- 

:U6. Government jiostal and i^nrina^fi hnnJxS.-- The 
un\ ernment comes into direct e()mi)etition with the char- 
ti red hanks through the ])ostal and government savings 
anks. The jiostal hanks were estal)lished in 18(')7, al- 

oiigh they did not hegin oj)crati()ns until i\])ril, ISfJH. 
There is also a system of savings hanks under the eon- 
tiol of the minister of finance. Prior to C'oid'ederation, 
■A svstem of savings hanks was in existence in the mari- 
time provinces, under the control of the ])rovincial gov- 
( itiments. These hanks wei-e taken o\er hy the Domin- 
ion in 1H()7; hut the system is gradually heing ahsorhed 
hy the postal savings haid<s. 

rntil IHD'J the amount deposited l)v one person in one 
year was limited to $.'}()() and the total deposit could not 
exceed $1,000; hut in 180'J these amounts were changed 
to $1,000 and $;j.000 rcsi)eetivcly. The average deposit 
is hetween $200 and $.'{()0. which indicates a patronage 
hy others than those l)i'longing to the working-cIas>. 
In (ireat Britain the average deposit in the postal sav- 
ings hanks is $7.^, and in Helgium ahout $<>.!. 

It was originally provided that the deposits should he 
in\csted in Dominion securities, hut in 1H7.") this law was 
I (pealed. The deposits are now handed over to the 
i( ceix er-geiieral to he used hy him on currctit account. 
W'ifhdrawiils are paid hy him. 'I'his creates a floating 
iiidchtedness of ahout $.")7.000.000. payahle on demand. 
I-'or more than twtnlv yeais the rate of interest was 
I p<, I cent, hut it was reduced in IHHO to .'J' '._> per cent, 

'^^iM in i oW I TO ii p* ' i"i"iit. '»»ii("ii' ii ri»''."» SitifWi^. i TiiJ 

I hart ml hanks ha\f had to fnllow dose'y the late pai<l 







ill the postal saving.s banks, and this has led to much 
criticism of the n()vernnu iit's ])olicy Indeed, it is about 
the only complaint made by tiie hanks as a whole. The 
receiver-jifeneral maintains a reserve of 10 jier cent of 
the total deposits in j^'old ; and a balance of about $o()0.- 
()()() w ith the chartered banks to meet withdrawals, these 
being paid by check on the banks. 

As has been said, the chartered banks object to the 
comj)etiti()n of the postal baid<s maiidy upon the ground 
that the ii ])er cent interest rate on deposits is exces- 
sive: and that thev are foi-ced by the action of the aov- 
crnment to niaintain the same rates. They |)oint out. 
further, that this money costs the govenunent a good 
deal niiii-c tha?i .'{ j)rr c( tit. wjien the ex{)enses of man- 
agement are also considered. Although a considerable 
sum is placed at the disposal of flii' govermiient by the 
depositois. that money must be always subject to pay- 
ment j)ractl("dly on demand. The bankers argue thit 
the government could secure the same amount of fun(! , 
])ayable only at a fixed time, at about the same interest 
rate. !)y the sale of its bonds. All this, of course, is re- 
ganling the (jucstii-n nurdy from one point ol' view. 

The (|uestion of interest paynu nts. thtii, is the one 
that specially interests the iliart<re(l banks. Thev in- 
sist that •'{ per cent is loo much lo pay when the cost of 
manageuicnt is .-dso considt rrd. Just wjiat is the cost 
of management is indicated by a statenuiit fuiriished 
on .\i)ril 21', r.»i;{. by .Mr. .1. K. Hourke, Controller 
of the ( ii'Tcni-y : 

( jti r ('(///, n'lr lilies hfin!. dcjxisil.s. 
Cost of managinicni and interest paid: 

( Jo\ (1 luiicnl sa\ inns banks .'J.i j' ; 

I'osf-otliff' sa\ ings b.ntks ',i.]'2' , 

A\( rage rate .'J.I.'J.T . 


To which niiist he add'd intcivsl oji ^old reserves 
(10 per cent of hahmce) and interest on l)ank hahmee 
iKjiiired to f)e held to meet withth-awals (say J^oOO.OOO) . 

l''Ji'eetive rate allowing interest on o^old reserves and 
liaiik balances at 3 per cent, .'}.t51 per cent. 

/'or fixca] !ic,ir l()l 1 12. 

Average balance (tleposits) $57,()()(),()()() 


Salaries. printin<r. etc 12().0(M) 

Interest piiid depositors l.()H(). •'$(>.'{ 

Interest at .'{ per cent on ^old riservc of 

>i<5,7(i(),()()0 172,800 

Interest at >\ j)er cent on bank balance of 

$500,000 1,3.000 

Tocal $l.t)HH,10.'J 

Under the ren;nlations, deposits bear interest from the 
first day of the tnonlli sncceediiig that in wliieh the de- 
posit is made, and interest is charged on withdrawals 
from the first day of the month on which the w ithdrawal 
is made. The gain in interest which is thns made (S.'jc,- 
.'!!>S) offsets the charges for rent, fnel and liglit. A 
more detailed statement of the cost of management and 
interest paid follows: 

(lo-icniincnt fidxiiiffs Ixnik. 

Ax crage balance dm ing !!ni-r„' *U.000.000 

Salaries, etc S'iO.OOO 

Interest paid 421; ,800 

Total *t.V-'.H00 a.U^o 

(,— \ 11 .;: 


Post -office .sa'citi^.s hanks. 

Avera«re balance dvivm^ 1911-12 $43,200,000 

Interest i)ai(l $1,257,503 

Estimated cost of nianagenient 
(salai'ies. eonmiissions. print- 
ing, etc. ) 90,000 

Total $1,347,503 3.12^'r 

i ■ 

It Mill l)e seen from this statement that the govern- 
ment pays virtually 3l [, per cent for the use of these 
(lei)osits. when interest and cost of administration are 
included. On the other hand, the Dominion can borrow 
in the London market at about 4 i)er cent. It will be 
si'cn. therefore, that little gain accrues U Mie Domin- 
ion througli these banks. On the other liand, they have 
not greatly stimulated savings; for the deposits have 
remained almost stationary during recent years. When 
it is recalled that the chartered banks have branches in 
almost every town and village in Canada it can be seen 
that the need for |)ostal savings banks is not very acute. 
They draw money away fiom the commercial banks of 
the country, that might otherwise Ik- ctnj)loyed in the 
business of the nation. i\^ long as the chartered banks 
ai-c willing to receive deposits of $1 and u])v.ards, and 
aie willing to furnish banking faciliti(^ to every section 
of the country, it cannot be said that there is any great 
need for government banks. Perhaps the oidy justifi- 
< at inn of postal savings b;mks is that they regulate more 
or less ttic interest rate i>aid on dej)osits by t!ie rhartercii 

547. dit'fipcr niiricnitiiral credit. — Heci-ntly a 
fi(>man(i has t)eeri made, especiaHy m xhv \\ Csi. ior 
cheaper credit facilities for tl farmers. It is hoped th'' 



■: ' H : 

oovernment will eiu'()ura<?e the formation of co-opera- 
tive credit societies, or else will make loii^-timc loans 
to the farmer somewhat after the Australian plan. The 
government of Saskatchewan lias displayed the greatest 
interest in this movement. It sent a commission to Eu- 
rope in 1013 to study the question, and to make sugges- 
tions for some measiu'e that would result in furnishing 
credit to the farmers at a low interest rate. This is a 
l)rol)lem that has excited also the deepest interest in the 
Iriited States. 

Could rur.'l co-operative, credit societies be safely 
formed, the farmer would undoubtedly benefit. The 
farmers in the West are, as a rn\c, of the debtor class; 
although many are in a \ery j)rosperous condition. 
These latter have comfortable homes, own automobiles 
and may evcji ])ossess a bank account. They prefer to 
conduct their business on the principle of keeping out 
of debt. 

But many of the more prosperous element are not 
independent of the banks. In a sense, all farmers are 
interested in banking, whether they have a siu-jjIus at 
the bank or not; whether the ruling ])rices are high or 
low; whether their business is j)rosperous or depressed. 
.Mniost all farmers can make use of c/edit to improve 
tlieir condition, to make a good farm better. Moreover, 
it is not at all certain that the farmer who makes it a 
rule to keep out of debt really does so. 11' he has no 
•surplus he recpiircs credit for domestic ])urposes, arid to 
larry on his business. 11 is i?i(lebl(Miness to tjie store- 
keeper is as real a^ if !»' wcrt^ iiul' hted to the banker. 
II has the ad(]e<l disadvantage that the system of bny- 
'4 on credit from the store-keeper is likely to cause a 
iiueh greater consumption of his means than would b*.- 
< titailed liy any interest rate he would pay his banker. 




For, in the first place, tlic store-keeper who sells on 
credit must buy on "ion^^ time"; he thus starts in hy 
payin<4' 'long time" prices, and he nmst, therefore, 
char'^e "lono- time" profits. Tlie farmer may, indeed, 
be surrounded by credit stores, and may pay up to 100 
per cent for tlie use of money; although all the time lie 
is under the impression that he is living up to the prin- 
ciple of "keeping out of debt." The fact is that he will 
be really out of debt o?dy when he can keep an open 
bank account Avhich will enable him to place his busi- 
ness on a cash basis. 

548. Co-operative credit s()ciefieft.-~\y\\] the co-opera- 
tive credit society permit him to do so in Canada? To 
a certain extent that has been answered by the establish- 
ment of co-opcM-ative people's l)anks in Quebec. M. 
Desjardins was the originator of this movement in 
Canada, and, in fact, upon this continent. He organized 
the co-o])erative bank of Levis in 1900, of which he has 
ever since been the i)resident and manager. The suc- 
cess of this institution was so striking that many similar 
societies have been established in the Province of 

Knowing the prejudice of the French Canadians for 
anything resembling uidimited liability, M. Desjardins 
adojjted a princi])le similar to that prevailing anions 
the mutual savings baid<s of the New England States. 
In these there is no capital stock, the depositors alone 
])rovi(lingthe fimds, and enjoying the right to withdraw 
their money almost at will, a mere notice being required 
if the necessity of so doing arises. 

The working capital of these credit banks is com- 
posed of shares and deposits. The distinction between 
a share and a deposit is that the former is made up oC 
savings with a view to providing for needs more or less 



Rinote. The sliares are similar to tinK' deposits. The 
deposit consists of money put aside for daily use like 
the checking accounts at a hank. 

Tlie main idea of this system is very largely that of 
tiic uncai)italized savings hanks of the United States. 
There is this difference, however, that the savings of the 
working classes are loaned to such working people, 
^\hetiler in tlie towns or tlie country, as happen to he 
in need of funds. This has eliminated the professional 
money lenders and the usurers who have taken advan- 
tage of the necessities of the ])oor. 

Tliere is hut one rule which guides the policy of 
making loans — the sums advanced nuist he put to some 
leally useful and productive purpose. Experience of 
more than a century in Europe, and of thirteen years 
in Quehcc. proves that institutes of savings and credit, 
in tlie form of co-operative credit societies, are prac- 
ticahle among the huuihler classes. 

It should not he forgotten, however, that the co-oper- 
ative people's hanks are associations deaUng only with 
their memhers. The j)ersonal factor, therefore, is em- 
phasized, (iood habits and j)ersonal integrity count for 
much in these associations. Moreover, the societies must 
he restricted to narrow circles in the community; for the 
whole scheme rests upon i)ersonal contact and per- 
sonal knowledge. Tlie basic idea is not the building 
up of huge societies; hut rather of societies that 
will he able to look after the wants of their borrowing 

Eoans may he made for long peri^xls, even for ten or 
lifteen years, once the guaranty fund, made up of sur- 
])lus ])rofits. has reached a certain proportion of the 
g( neral assets. Intenst rales are made as low as the 
average rate in the louiniiniily : but they must be matie 






moni:y and baxkixg 

sufficiently liii-h to i.^Anwi hiiuls to the society. While 
these co-operative credit societies have proved of ^reat 
service in the Province of QMel)ec. in their limited 
si)here, it is douhtiul whether they would prove an e(iual 
success in the Kn^lish-speakinn' provinces, and especi- 
ally in the i)rovinces of the West, it is the opinion of 
many mIio are entitled to he heard on such a matter that 
they would not. The humbler classes would prefer the 
])ostal savings hanks as depositaries for their savinos 
to any co-()i)erative society. In the West the diffi- 
culties in the way of estahlishino' such societies are 
even greater. For one thing, the population is in a fluid 
state. The peoi)le are not intimately acciuainted with 
each other. They would hesitate to make a full state- 
ment of their affairs to a conmiittee of their neighbors, 
as IS necessary in granting a loan by a credit society. 
JMoreover. their business operations are conducted on a 
comjjaratively large scale. Those who have money find 
that the chartered baid^s can take care of their Inisiness, 
Those who are borrowers can get accommodation from 
the banks, which have an office in almost every settle- 
ment. It is true the interest rates are high in compari- 
son with those obtaining in the East; but when the 
risk and the cost of administration are considered it does 
not appear that the chartered banks are charging exces- 
sive rates. Kew shareholders could be found for co- 
operative baidxs if interest rates were below current 
(|uotations. It is com])aratively easy to find ready bor- 
rowers in the West at prevading rates. When all these 
facts are considered it must be coid'esscd that tlie n.- 
oju-rative credit .society will hardly become a serious 
factor in banking in the West. Hut undoubtedly pres- 
sure will i)e hiougiit to licar upon cillierthe federal gov- 
i'rnmcnt or upon tlir |)ro\ im-ial administrations, or u])on 




both, to find ways and means for providing, if [)ossible, 
I lieaper credit to the farmers of the AVest.' 

'Thf Royal Commission, appointeii by tin; govcnimciil of Sasivat< hewan, 
li,i~ np(jrte(l (N'ovenibiT, 19l;ij in favor of a system iif rural iriMlit liaM'd iipcm 
liic l.andschaften of (icrniany. The outline of Iho schenic is as follows: There 
si;, ell lie an executive committee of three members, appointed by the government, 
and nil advisory committee of fifteen, nonunate<l l)y the local societies. Local 
Mil icties shall consist of not less than ten members, with control ov<t land sufficient 
III raise loans aggregating at least $.3,000. Loans will be made on ap|)roved lands 
up to 40 per cent of their value. Funds will be raised by selling bonds guaranteed 
liy the province, anil .secured by the lands held by members. Members will be 
jiiiiitly aiid .severally liable for any loss that may occur; but the liability of lach 
sli.ill be limited to one ami one-half times the amount of his loan. 

It is proposed, aLso, to estiiblish a central bank for the .six'ieties, with the help 
of the government. Loans will be made on the liasis of personal .security. If these 
soiieties are establishi'd n(j injury will be tloiic to the business of the chartered 
banks; if anything, their business will be increased, as the local societies will act 
as feeders to the present banking institution-i. 




(The numbers refer to the numbered sections in the 



1. Name the chief reason why the study of money 
and banking is of advantage to the business man. Is 
it fair to })hice as much bhune u{)()n Icgishitors for a 
bad currency system as upon architects for a bad build- 

2. Were warnings given of the panic of 1907? 

3. What is the relation between the sciences of money, 
finance and economics? 

4. What is the science of finance? 

5. Show how every business has a technical and a 
business side. 

6. AVhy is business the result of the specialization of 

7. Name the phases of production. 

8. How is the changing of ownership productive? 

9. Wlien did the value of exchange begin to be recog- 

10. In what countries are tlie rights of private prop- 
erty most strictly enforced? 

11. Distinguish between property and wealth. Is 
money wealth ? 

12. What is the effect of the integration of industry? 





13. Describe three stages of economic history based 
on the method of excliange. 

14. What are the obvious hmitations of exchange by 

15. Show how the introduction of a medium of ex- 
change simphties trade. Exphiin why "all trade is 
iiiially barter." 

IG. Show that money represents incomplete ex- 
changes. How does the miser differ from other people 
in his attitude towards money? Show the similarity be- 
tween money and a railroad ticket. 

17. Define credit. AVhat other meaning of the word 
sometimes leads to confusion? 

18. Why is credit a good medium of exchange? Do 
you think that merchants and bankers earn their incomes 
as truly as farmers or laborers? 

19. Are money and credit real wealth? Would you 
expect a millionaire to have much money in his posses- 

20. Distinguish between production and consumption 

21. Describe tlie entrepreneur system of production. 

22. What is cajjitaH From what source does it de- 
rive its ecoiiiomio importance? 

23. Define "capitalization." How is it possible to 
know when a corporation is over-capitah/.ed? 

24. From whom comes the demand for capital goods 
and for what purpose? How may the entrepreneur ac- 
quire purchasing power? 

25. On what human xuouncs dues the atvumuiatioii i>i 
capital depend? 

••i • 



'2(». Name four methods l)y wliidi the saver of tlie 
income may invest. 

27. Show liow a f^ooj currency system increases the 
incomes of all producers. 


28. Explain how value is a register of economic 
forces. Explain the meariing of the phrase, "prolit is 
the mainspring of industry." 

29. (iive a definition of the word "value." What is 
meant })y the expression "common measure <>t' value":' 

30. (iive the legal definition of the dollar. 

31. What is the sole utility of money? Why is it 

32. What object'ons are there to gold as a standard 
of value? 

C3. Show why the cost of production theory of value 
is unsatisfactor}'. 

34. State lirielly the utility theory of value. 

35. Define "marginal utility." Show how it is illus- 
trated in tliC demand for automobiles. 

3(5. \\'h,it is tjie "law of satiety"? Wh;it is its relation 
to tlie theory of marginal utility? 

37. Hov mav the two theories of value be reconciled? 



38. Define "exchange utility." 

3'.). What commodities were first used as standards of 

■10. A\'hat three functions of iiiotu-v were dcxeloned 
in primitive money? 

41. What was wampum? ^^'hat gave it its value? 



42. Why were beaver skins used as money by the 
t'aily settlers of the rnited Stalest 

13. What were the cUsadvuntages of agrieultural 
|)r()(hicts as money? 

44. Wliat Uiws were passed in A'irginia to maintain 
l!ir vahje of tobacco? Did they succeed? Compare the 
(Instruction of growing tobacco phuits in early Virgmui 
i.) the same acts committed by the "night riders" in 
Kentuekv in 1900. To what modern form of currency 
in the Ignited States may the "tobacco notes" be com- 
pared ? 

45. Name the ([ualities which must be possessed by a 

good currency. 

40. Why is the (juality of divisibility lecessary? 

47. Whv were beaver skins unsuitab